Mercer, the pensions' consultant group, said today that the bankruptcy of US investment bank Lehman Brothers has implications for pension funds.

Mercer said that at mid-day today, it was already clear that markets are reacting negatively to the weekend's dramatic developments in the US financial system with European equity markets down over 4%. While the full extent of the resulting damage will begin to emerge over the course of the week, it is apparent that pension funds are exposed in more ways than one.

Mick Moloney, European Leader of Mercer's Financial Strategy Group commented: "As well as the more conventional impact on pension funds through losses due to holdings in equity markets, the developments at Lehman represent the first real test of the documentation underlying many 'Liability Driven Investment' or LDI strategies.

"Many pension funds now use derivative contracts for risk management purposes. These include interest rate and inflation swaps and equity derivatives. While larger funds have worked directly with investment banks on these contracts, others are exposed as a result of actions taken by their investment managers. These strategies have worked very well in the main, protecting funds against recent adverse market movements. The underlying contracts, however, involve complex legal documentation and arrangements around collateral (the assets backing valuation movements in derivative contracts).”