The pension scheme of the City of London is considering tightening the reins on its fund managers to get more control over investment decisions after a tough 2008.
The scheme is also mulling whether to invest more in alternatives like private equity to broaden its assets and help weather market changes.
The City’s defined benefit (DB) pension scheme and two charity funds, which look after parks and maintain bridges in the square mile financial district, have combined assets of about £1.4bn.
The DB scheme currently sets broad allocation targets with about 80% in equities and allows fund managers to make unconstrained investment decisions to exploit market movements while some have scope to switch in and out of the asset classes.
“At the moment we give them (fund managers) quite a degree of discretion,” said Paul Mathews, corporate treasurer at the City of London Corporation.
“This is one area the committee wants to look at: whether or not they should be setting their asset allocation,” he told Reuters.
The move is an effort to introduce “best practice” and does not reflect any performance issues, he said, although he conceded 2008 was tough.
Unconstrained mandates contrast with the passive, benchmark-tracking mandates which in the past have dominated pension scheme investments. The rise of unconstrained investment during the boom years was designed to give fund managers more power to make swift investment decisions rather than relying on the notoriously slow allocation decisions of pension trustees.
However, such mandates make it difficult for trustees to control exposures and can leave a scheme at risk from market shocks should fund managers target similar sectors or regions.
The City of London scheme expects to appoint in February 2010 a consultant to advise on the asset allocation move as well as giving strategic advice on alternative investments such as private equity, in which the three funds have about 3 percent of assets.
By spreading investments across a number of asset classes, pension schemes hope to limit volatility and diversify income streams to weather market changes.
“We never got to invest as much as we wanted to (in private equity). That is an area we want some more strategic advice as to whether we should be increasing allocation to private equity and other alternatives,” Mathews said.
The schemes’ assets are managed by seven UK and foreign asset managers and for the last five years the trustees have been advised by John Woods and Associates Ltd.