TORONTO - Federal public servants may see further shrinkage of their pension fund after it took writedowns totalling more than $1.4 billion in the last fiscal year on asset-backed commercial paper and other financial instruments.

The annual report of the Public Sector Pension Investment Board shows a 0.3 per cent decline in the value of its $35-billion portfolio during the year ended March 31.

That included a writedown of $450 million or 23 per cent of its $1.97 billion in non-bank asset-backed commercial paper holdings, though one analyst suggested ABCP-related losses could be more than double that amount.

The eight-year old Crown corporation, which handles pension investments for federal public servants, the Canadian Forces and the Royal Canadian Mounted Police also wrote down $470 million related to its $1.4-billion exposure to collateralized debt obligations, or CDOs, structured instruments based on a variety of debts.

PSP Investments also booked a $510-million mark-to-market loss on credit default swaps, essentially insurance contracts for bad debt.

However, independent financial analyst Diane Urquhart estimated that the ABCP pain could be closer to $1.1 billion because the PSP's current valuation of its assets at $1.5 billion is "far too high."

She placed the trading value closer to $889 million, based on writedowns by other holders of the notes, which were regarded as secure short-term investments until the market seized up in last August's international credit crunch.

Urquhart said she also found it "very unusual" that the maturity dates of the firm's ABCP ranges from Aug. 13, 2007 to Dec. 28, 2008, which she says suggests that PSP Investments might have bought some of the troubled paper from other parties.

Canadian ABCP was a victim of last summer's crisis in U.S. subprime mortgages. The assets were frozen last August amid worries that some of the short-term paper was tied to dodgy American home loans, in addition to bundles of higher-quality mortgages, car loans, credit card receivables and other assets.

"The non-bank ABCP owners I spoke to had maturities of under 90 days and so the question to be asked is whether PSP Investments owned all of its current position before the freeze (on) Aug. 13, 2007 or did it buy some of it from other parties after the freeze occurred?" Urquhart said in a note.

"If some was bought after the freeze, why was this done?"

PSP Investments spokeswoman Anne-Marie Laurendeau declined to discuss whether the fund had purchased commercial paper product after the freeze.

"On this point, the only public information is in the annual report," she said.

When asked whether further disclosure would be provided to the public, Laurendeau said that details will only be provided in next year's full-year wrap up.

In addition to the writedown of ABCP which has been frozen since last August, PSP Investments also said its overall portfolio declined by 0.3 per cent in the fiscal year, the first drop since 2003.

"This was the first time in the last five years, and since I became president, that we generated a one-year total return below that of our policy benchmark," fund president Gordon Fyfe wrote in a letter included with the annual report.

"However, it is important to keep in mind that in a period of severe stress and volatility, preservation of capital and minimization of investment losses are our overarching priorities."

PSP Investments is regarded as having one of the largest holdings of Canadian non-bank ABCP, behind the $13 billion held by the Caisse de depot et placement du Quebec, and more than $2 billion held by National Bank (TSX:NA).

All of these institutions could face further writedowns as the valuation of commercial paper continues to remain frozen on the markets, noted Rick Robertson, a professor of personal finance at the Richard Ivey School of Business.

"Along this journey it's going to be a very bumpy ride," he said.

"I don't think that all the sudden you'll turn a corner and say 'Oh we got that problem behind us."'

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