UK - Mercer has found that UK investment managers are open to the idea of using liability benchmarking – though it says there has to be more dialogue between trustees, consultants and managers to make them workable.

Mercer Investment Consulting polled 30 investment managers to discover their attitudes to using liability benchmarks.

“The reaction to this new benchmark has been generally positive amongst the 30 fund managers that Mercer recently surveyed,” Mercer said in a news release. “Nearly three-quarters (22) said they would participate in mandates using this basis, even though they are not commonly used at the moment.”

The liability benchmark approach would require managers to determine the exposure to asset classes at any point in time, as well as the best use of their active management skills across asset classes, says Mercer’s head of investment strategy, Andy Green.

In a report, Mercer’s Ralph Frank says the idea of liability benchmarking has been prompted by the worsening position of defined benefit pension plans.

He said that the firm has been considering “for some time” whether there is merit in a different approach – “one that arguably goes back to a time when a plan benchmark did attempt to relate more specifically to plan liabilities”.

“Our own strategy work for clients has for some years sought to identify a least risk best matched investment strategy for individual plans, which is invariably some combination of fixed interest and index-linked bonds.” He says it is now “generally accepted” that plan liabilities are most closely matched by bond investment.

“The aim,” he says, “is to seek to capture a more widespread basket of return opportunities and to seek those opportunities relative to some form of liability matched benchmark.”

“The focus is on achieving a return relative to some measure of the plan liabilities, such as gilts +4% per annum,” he says.

Mercer says few managers had any practical experience of managing mandates set by reference to liabilities.

“With wide interest in the industry to provide some alternative approaches to pension fund investment, we believe there will be increasing interest in this type of mandate.”

He added that the managers have highlighted associated risks. “There would certainly need to be a great deal more dialogue between the trustees, consultants and managers to make these liability benchmarks workable in practice,” Frank says.

Green said: "Clearly there is wide interest within the industry in providing alternative approaches to pension fund investment.”

Separately, Mercer Human Resource Consulting has been appointed by publishing firm Emap to provide actuarial and investment consulting services to its pension fund. Emap has a defined contribution plan with more than 5,000 members and a closed defined benefit pension plan with over 1,600 members.