The whole approach in past years of following a consensus asset allocation policy is becoming increasingly inappropriate for many pension schemes," says Peter White, director of group pensions at Tate & Lyle in London. He explains: "The increasing maturity of many large UK defined-benefit pension funds means that trustees must now choose the appropriate asset mix to match the nature of their funds' liabilities. Any view of how the various asset classes in the local and global markets will perform in future is no longer the sole driver in determining the asset allocation policies of UK pension funds."
White's view is not hypothetical. Last autumn the £520m group pension scheme reduced its holding in UK equities to around 45% of the fund as a result of a switch of about one third of the fund from equities into index-linked gilts. "Look at the profile of our membership," says White, "we have about 2,500 active members but approximately 9,000 deferred pensioners and pensioners. That's a mature fund. In the past it was fine to have a high equity exposure because, in the longer term, the higher volatility was outweighed by the superior performance. But the minimum funding requirement now means that the crunch comes at every three-yearly actuarial valuation."
White thinks that over the coming year the UK equity market will be largely driven by "weight of money". UK pension funds may be net sellers of UK equities but this could well be off-set by US investors coming into the market.
Yet Tate & Lyle's trustees press the active managers of their UK equities hard. Mercury and Baillie Gifford are set the target of beating the FT-SE All Share by 2 percentage points over 4-year rolling periods. "It's no good basing investment solely on sector selection if you want to hit that target," explains White, adding: "Investment managers need to move away from saying that's the sector that will outperform. If you want to add the higher value, stock selection is the key. Your investment manager has to pick the quality companies in which to invest. This is the skill which you are paying for".
Looking at the current UK market conditions, White adds: "Sure, the strong pound is making it tough for manufacturing companies in the export market. But that doesn't mean you don't invest in a quality UK exporting company which made good use of its windfall gains - gained from earlier trading when the pound was undervalued - to stream line its business." White says that the loss of Advance Corporation Tax recovery has marginally reduced the attractiveness of UK equities but adds: "When you are still able to achieve double digit real rates of return from this asset class this loss looks less problematical". Roger Self"