UK – Pension funds should be happy to be the "new banks", the CIO of the UK's Tesco pension fund has said, but argued that funds would not be fooled into entering deals that were not of benefit to them.

Steven Daniels, CIO at Tesco Pension Investment, also discussed the problems posed by pursuing twin performance benchmarks now that his organisation had been granted the mandate to administer the supermarket's £7bn (€8bn) defined benefit fund.

Speaking at the National Association of Pension Funds Investment Conference in Edinburgh today, Daniels said pension funds had taken the place of banks in an environment where the lenders were forced to deleverage.

"Everybody sees us as long-term lenders – that's great, and I am happy to participate in that as far as possible," he told the audience.

But he insisted any deals had to offer terms suitable to funds.

"We are banks – potentially good banks – but we are not mugs," he added. "We need to pay great attention to how everything is structured that we do."

Daniels also explained that the new investment management company, celebrating its first birthday in April, had received a twin benchmark as performance targets – the first a standard benchmark they were asked to outperform on a rolling three-year basis, the second a longer absolute-return target more aligned with the fund's discount rate for valuation.

"As soon as I saw that, alarm bells started going off in my head because one thing that is very difficult to do is manage towards a relative performance target and an absolute performance target at the same time, and try and beat both," he said.

Daniels added that this was even more problematic in light of the current period of uncertainty, where clear market trends were lacking.

He said it was therefore "very difficult" to outperform a relative target on a regular basis.

"As a consequence of that – and our view that we are in this period of volatility for some time to come, with no clear trend – we decided to focus more on our long-term target to make sure all the investment activity we undertake is going to help us have the best possible chance of achieving the long-term target for Tesco," he said.

Daniels admitted that a longer-term investment horizon had been pursued "forever" in other asset classes, such as real estate.

"Similarly, when you invest in private equity or venture capital, those are 10 to 12-year investments, and you are looking to achieve returns over the long term, and we are continuing to do that," he said.

He said the now established approach to equity was constructed along similar lines.

"What we are looking for are equity investments on a global basis that are going to give us the returns trustees require," he added.

"But rather than to necessarily beat an equity index over every quarter, we are quite happy to go back to the trustees and explain to them why we are having periods of underperformance."

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