LONDON - An admission by British police and politicians that a terrorist attack in London is inevitable has alarmed pension and money management executives in the city's "Square Mile" financial district and elsewhere in the United Kingdom.
After uncovering plots by separate terrorist networks to gas the London Underground, shoot down an airliner over the city with a shoulder-launched missile and blow up key targets in central London, Sir John Stevens, the metropolitan police commissioner, told reporters a successful terrorist attack on London was "inevitable."
His thoughts were later echoed by Prime Minister Tony Blair and Ken Livingstone, the mayor of London. Their sentiments have raised fears in a sector already battered by the market fallout that was prompted partly by the terrorist attacks of Sept. 11, 2001.
"I think there's a sense that we are exposed and vulnerable to an attack because we are perceived as a softer target (than the United States) and because we have supported the U.S. in the Iraq campaign," said Ron Liesching, director of research at Pareto Partners, London, which manages £20 billion.
"There's a sense that it's our turn. Three years ago when we brought clients in to show them our (London) offices and we'd tell them we had plastic on the windows in case a bomb went off, their eyes would glaze over. Now is a different story," he said.
Said Keith Wade, chief economist with Schroders PLC, London, a money management firm running £40 billion for U.K. institutional clients: "I think there is justification to the concerns. There's no doubt a terrorist attack would have an impact."
Effect on portfolios
Pension schemes and money managers' specific concerns have centered on how portfolios would be affected by an attack - real estate holdings in particular.
"There is a risk (of a terrorist attack hitting investments) because we own a number of London offices," said Richard McIndoe, director of finance at the £6 billion Strathclyde Pension Fund, Glasgow, the city council's employee pension plan. The scheme has 8% of its portfolio invested in U.K. real estate.
"I have had discussions with our property manager about those risks, on what are the implications of disasters, including major terrorist attacks," he said. He declined to reveal details of the discussions with the scheme's real estate manager, Aberdeen Property Investors, Glasgow.
Another U.K. pension scheme concerned about the fallout from terrorism is the £3 billion London Pension Funds Authority. Amanda Walker, director of finance and investments, said the investment committee decided to hold off on its planned investments into real estate - part of a revised strategy this year to invest 15% of assets into alternative investments - because of fears over property prices.
Terrorism fears were indirectly a factor in the decision, she said, although this wasn't discussed by the investment committee.
"It would be devastating, for the loss of life involved in terrorism, but also in terms of the impact on property in London," she said.
Rental incomes on central London offices fell 20% in 2002 and vacancy rates are shooting up, according to figures published by Savills Fund Managers, the property money management unit of Savills PLC, London.
The latest figures for central London property prices showed a fall in January for the first time, according to property performance firm Investment Property Databank's index, which tracks the performance of investments of more than £100 billion in the United Kingdom.
Terence Edwards, vice president of the real estate practice at global insurance broker Marsh Cos. Ltd., London, said most money managers and British schemes significantly exposed to property now have terrorism coverage in their insurance portfolios. Premiums for such coverage have risen twofold in the past year, he said.
The immediate financial and market effects of a terrorist attack depend on the nature of the incident, Pareto's Mr. Liesching said. He said his office had submitted a report on a worst-case scenario to his board in the United States, outlining the aftermath of an attack.
"There would be the obvious immediate things, like the flight to security - the Swiss franc would increase, gold prices would increase, government bond yields would fall, equities would decline," he said.
The length of time before a recovery would depend on the nature of the attack, he added. "If there is a biological or nuclear attack that's closed off central London, then the economic impact over at least the medium term, in terms of GDP growth, would be serious."
Scheme administrators also are concerned about how such an attack would affect equity portfolios because of reduced corporate earnings and even market reactions in the shorter term.
David Birtwhistle, head of group pensions at Imperial Chemical Industries PLC, London, said his £6.9 billion scheme already has taken steps to significantly reduce its equity portfolio in favor of bonds.
The plan has moved from 75% investment in equities to less than 30%, although Mr. Birtwhistle stressed this movement wasn't just motivated by the political concerns.
The move into bonds has taken place over the past 18 months, and he called it a strategic decision taken by the scheme's board.
Others interviewed thought the short-term impact of terrorism was real, but mostly insignificant in the longer term.
"It would be a disaster, it could be worse than Sept. 11. But if you look at what happened then, you had a dip, then the market recovered," said Bill Muysken, global head of manager research at Mercer Investment Consulting, London.