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IPE special report May 2018

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Merseyside looks set to drop BGI mandate

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UK - Barclays Global Investors could lose the contract to manage a UK equities mandate for the Merseyside pension fund, following a review of the local government scheme's asset allocation strategy.

Details of Wirral Council's pension committee agenda prior to a meeting on November 26 reveal some changes to the asset allocation have been recommended by the £4.2bn (€5.8bn) pension fund's investment consultant, Mercer, which could see the fund's existing "core UK equity manager" replaced with a mandate operating under an "unconstrained/best ideas" approach.

Official minutes from the meeting have yet to be published but officials confirm the new asset allocation strategy has now been approved by the pensions committee.

As a result, it is likely an active global equity manager will be appointed at some stage, following a small increase in the fund's overseas equity weighting from 25% to 29% - the new total equity weighting now being 59% instead of the 56% allocation set at the last review in 2004.

According to a report by the Wirral authority director of finance, the external UK equities mandate, believed to be run by BGI, is "being split and replaced with two mandates with higher out-performance targets", the volatility of which will be offset by "a lower volatility internal portfolio" while a fund of funds portfolio will be created from the internal portfolio "to provide further diversification and incorporate ‘best ideas'".

Elsewhere within the public agenda documents, the Merseyside Pension Fund said it intended on November 26 to discuss the "management of UK equities" and "early termination of BGI contract", however no further information is provided as the fund is exempt from doing so under the Local Government Act 1972.

At the same time as increasing its equity allocation, Merseyside has also raised its alternatives holding from 6% to 10% and is widening its range of alternatives to include global property, timber and "portable alpha", although alternative assets are more likely to placed in private equity, suggested Peter Wallach, head of the pension fund, as well as some interest in commodities and currency hedging - an aspect Mercer recommended in its report, when suggesting the fund should look to hedge currency exposure "of at least part of overseas equities".

Wallach said while the new benchmark requirements and increased exposure to equities and alternatives are not huge, the change does allow the scheme to match its risk management requirements regarding newer members.

"The thinking is we have actually had the number of active members increase since 2004, when we last reviewed the investment asset allocation, so we feel it is appropriate to reflect that in the risk we are taking and is a reflection of our maturity," said Wallach.

"We don't think the change [of benchmark strategy] is a significant difference, it is more we believe, in looking for unconstrained managers, they will have the opportunity to provide what we need. If you want to get alpha, you need to give managers options," he added.

To accommodate the slight shift in weighting, the fixed income allocation will be cut from 26% to 20%, and index-linked gilts will shift to passive management, following a recommendation from Mercer this would give bond managers a wider opportunity set under existing mandates to offset volatility, while conventional bonds will be actively managed.

Similarly, cash weighting will be reduced from 2% to 1% but property weighting has been held at 10%.

All of these strategic benchmark changes are predicted to give the fund an annual return of 7.6% with a risk of 13% per annum, as well as increasing the prospect of being fully-funded by 20127 from 56% to 57%.

Wirral Council is the local government authority responsible for administering the Merseyside pension fund.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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