UK - Fund managers in the UK are divided over a call by a leading consultant to align their benchmarks with pension liabilities.
Hewitt Bacon & Woodrow believes fund manager products and capabilities have not kept pace with the changing needs of pension schemes.
It says that while schemes have used bonds in the past to reduce portfolio risk, they now use them increasingly to match assets with liabilities.
And the consultant also believes firms should drop traditional indices in favour of customised benchmarks that factor in the duration and complexity of pension liabilities.
But Aegon Asset Management head of fixed income Malcolm Jones said this strategy would only work for closed schemes.
He said that for younger or open schemes with a large equity component, the strategy would be “frankly a waste of time”.
He explained that liability benchmarks made sense for closed schemes as all they are doing is funding payments.
Gartmore Investment Management senior investment manager Paul Grainger was also opposed to Hewitt’s idea.
He said: “It does not make a vast difference what the benchmark is, as long as fund managers know what their target is.”
However, Hewitt’s call was backed by SSgA head of global bonds Mark Talbot who agreed that traditional indices do not align fund managers’ interests with their clients.
He pointed out that using either a customised or a liability benchmark would force fund managers to use all their skills to achieve positive returns.
Talbot said: “There is little point in a manager doing well against a traditional bond index if the index itself underperforms the liabilities.
“Using the pension fund’s liabilities as the benchmark shifts the onus on to the manager to use his skills and tools to meet a pension fund’s objective – namely, meeting future liabilities.”
He added that the one drawback of a benchmark consisting of liabilities was that it would make comparisons between managers difficult.
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