Ten years ago, the vast majority of UK pooled funds were mixed funds provided by insurance companies.
These funds invested in a range of securities and bonds, with the two key choices of asset allocation and stock selection left to the manager’s discretion. Over time these funds have increasingly held the majority of their assets in equities, a trend driven by commercial pressures.
Unfortunately, there was no explicit link with the liability profile of any pension fund, rather a general view that a heavy equity weighting would be fine, because pension funds on average had mostly active members, and as real assets were normally suited to active liabilities. The increasing maturity of UK pension funds and the minimum funding requirement call this view into question.
Hence providers are now offering tailored products. These take pooled funds at the asset class level, such as UK equities or overseas bonds, and then applies a scheme-specific asset allocation strategy. Pooled funds can be managed on active or passive bases; increasingly, index tracking is used. The result can balance a scheme’s need for good investment returns with its need to protect solvency. Hence one has a risk-return profile appropriate to each scheme, previously only possible through segregated management.
As providers the insurance companies have been challenged if not overtaken by the larger fund management groups in recent years. These groups, having acquired their expertise in segregated management, targeted pooled funds as a growth area. In this they were indirectly aided by periods of poor performance from some of the larger insurance companies.
David Clare is investment services director at HSBC Gibbs Benefit Consultants
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