The assets of UK pension funds are to grow by 23% by the millennium, from end of 1997 levels. According to Greenwich Associates research among 389 UK funds, assets will rise from £451bn ($748bn) to £553bn in 2000.

The growth rate of local authority funds at 24% is expected to outpace the 21% growth of UK corporate sponsored funds, while the funds of the UK subsidiaries of European and other non-US companies are likely to have the fastest rate in the period of 28%.

The trend to specialist investment management seems to be established as funds with over five managers are reckoned to grow by 27% over the two years.

Greenwich sees a significant shift in funds' asset allocation in the next two years as the UK active equity component declines by 2.3% to 35.3% of portfolios; in 1993, it was 44%. Meanwhile, the passive proportion of UK equity portfolios is predicted to grow to 15.4%, marginally ahead of the 1997 figure. The overseas equity component of portfolios will increase to 21.6%, from 20.3%, with the passive proportion hitting 4.5% of portfolios in 2000, bringing the total passive equity element to just under 20%.

The shrinking of the equity component in UK portfolios continues, the study finds, though only by 50 basis points over the two years, while from 1993 to 1997, it has fallen by 5.7%. The fixed income assets increased as proportion, due to rise to 18.8% from 17.2% in 1997, with UK assets showing the biggest increase by 150bps to 8.9%. Back in 1993, these amounted to 3.9% of portfolios.

What sort of annual investment re-turns are funds expecting? Green-wich quizzed managers earlier this year about their five-year view and found that they were more sober than in the previous study as to the different asset classes: Cash 5.8% (1996 study 6.2%); long-dated gilts 6.6% (7.6%); FT AllShare 9.2% (9.3%); overseas equities 8.8% (9.1%) and property 7.2% (7.3%). But with inflation rates of 3.6% predicted instead of 5% annually, the real returns expected may turn out to be higher.

As to where the asset allocation decision is being made, the balanced manager is in eclipse - down from 39% in 1996 to 30% this year. This is much the same proportion as for funds who do it internally. Of the largest funds of over £1bn, 38% still do their own allocation, while three years ago 53% did.

Specialist allocation managers are playing a part in 13% of largest funds, up from 11%, but they still only play a part in 4% of funds overall. The investment consultant's showing is strong here, as they are responsible for the allocation decision in 57% of cases, compared with 52% two years ago.

Over the next couple of years, no fund expects to introduce a new de-fined benefit scheme, while 12% say they will also have a defined contribution plan and 4% anticipate a hybrid arrangement. But in 10 years' time, UK corporate sponsors say that 20% of assets will be in DC schemes. The assets of the DC schemes run by 101 corporate sponsors are expected to grow by 59% in the next two years to £34bn.

The survey finds that the shift from balanced managers is gradual but pronounced, with 72% of all funds using them this year, compared with 79% in 1996 .

The 158 funds using specialist managers entrust them with an average 45% of their fund assets.

While WM and CAPS benchmarks are used by 72% of the 282 funds with balanced managers, just over a third use customised ones, and another 8% of funds say they intend to move in this direction, compared with just 1% opting for a universe approach. Customised benchmarks are used by 84% of funds with specialist managers.

At anyone time, about a quarter of funds have hired or are expecting to hire new managers.

Greenwich finds that UK funds are generally well funded with an average of 110% funding ratio, as de-fined by net present value of assets divided by the value of liabilities. Fennell Betson

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