The alliance formed between Hermes and Liberty International is designed to take advantage of the move to defined contribution (DC). Hermes will act as fund manager to Liberty International Pensions, the specialist pensions company, through a new insurance company Hermes Liberty International Pensions.
The BT Pension Scheme (BTPS) will transfer £1.5bn into the new index tracking and actively enhanced UK index funds this insurer will offer. It will be the largest single premium ever written within UK pensions. BTPS will pay £5m for a 10% stake in Liberty International Pensions
Ross Goobey says that Hermes started looking at the question of expansion about a year ago, after it was approached by a defined benefit (DB) occupational scheme, who asked Hermes to manage a portfolio for it. "Although it was a fair amount of money, we could not make any sense of it economically, in terms of their and our costs, other than putting it into a pool of some sort. And of course the tracking error would not have been low enough. The only pool that was available was through an insurance policy, which is what led us down the route of approaching Liberty."
He says: " Ideally the sort of investment management business for us is where people want us to do our specialist role. If we can get them to do it in a pooled way, so we can have just one other name on our deal slips then that's the way we want to go. It enables us to get more re-sources without all the expense of buying an investment management organisation - where there are no assets anyway, or developing a huge marketing operation where most of the money is down the drain."
Another attraction he sees is that of being identified as index plus manager.There are really only three large competitors in the index management field, Barclays, L&G and Gartmore Nat-West. "So there is room for another player, whereas all the balanced managers in the world are fighting for a rather shrinking cake. We leap in as one of the big index managers in the UK."
He describes the venture as an investment by BTPS in the Hermes Liberty product, with the funds being managed in exactly the same way. All that happens is that there is another name on the deal slip and the stock that BTPS holds currently in their own name will be in Hermes Liberty name. It was an important part of the deal to as-sure the trustees that their assets are as secure as they are now and that they are ring fenced from anything Liberty might do and that it was not going to cost them anything in performance terms. Liberty understood this. Who else was go-ing to provide them with £1.5bn seed capital?You can't do an index tracking fund with £100.""
The Liberty target market is the DC market, but there is no reason why DB schemes cannot go into this as well. It will be very cost effective. ""We are low risk active managers - that is our market niche.""
Ross Goobey takes delight in the fact that it was Hermes that first made the approach to Liberty International. "" The initiative came from us. We identified Liberty as going to go back into the UK insurance business and that they did not have an in-house investment manager. When we approached them, they said this was most extraordinary as we were going to approach you!'"" Fennell Betson"
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