LONDON -- U.K. pension funds' use of active U.K. equities is expected to shrink to 35.3% of total assets in 2000 from 44.1% in 1993, according to a new report by Greenwich Associates, Greenwich, Conn.
The study put the size of the U.K. pension market at L450.5 billion ($761 billion) at year-end 1997; most British studies estimate the total market size at L600 billion.
Active U.K. equities have shrunk steadily in the past few years, falling to 39.8% of total assets in 1997 and 37.6% this year, according to the consultant.
The shrinking active domestic equity allocation reflects two key factors:
* Lower overall equity allocations, reflecting the introduction of a minimum funding requirement and greater maturity of British pension funds and increased asset/liability matching. Equity exposure has dropped to 72.8% this year, down from 78.5% five years ago. In comparison, fixed-income investments now account for 17.2% of total assets, up from 14.3% last year and 11.8% five years ago, Greenwich reported.
* A big increase in indexed portfolios has boosted passive U.K. equities to 14.9% today, up from 10.8% five years ago. Index-linked gilts and passive fixed-income also have grown, to 7.2% now, up from 4.1% in 1993.
Maturity of U.K. pension plans is playing a growing role in asset allocation, as pension funds move toward asset/liability matching, the study found.
In contrast to an earlier WM Co. study that found similar high equity exposure for both mature and less-mature U.K. pension funds, Greenwich consultants found a greater difference in asset allocation between the two.
Greenwich consultants found that funds in which 35% or fewer participants are receiving benefits or have deferred benefits, 78% of plan assets are invested in stocks, and only 12% invested in fixed-income.
"By contrast, at funds where 75% or more of members are in these benefit or potential benefit categories, the proportion of assets in equities falls to 62%, and that in fixed interest jumps to 28%," said partner Rodger Smith in the report.
Confidence in active managers also has been declining, especially given rocky performance from some of Britain's leading global balanced managers, including Gartmore Investment Management PLC, Philips & Drew, and Mercury Asset Management PLC.
In each of the past four years, Greenwich has found that around half of plan sponsors believed that active managers would outperform index funds. This year, the proportion has dropped to just over 40%.
Index managers have been gaining business at active managers' expense, especially given a new push by British consultants to include a core passive portfolio.
So far this year, money managers Legal & General Investment Management Ltd. has won close to L7 billion in new passive business from U.K. pension clients, while Barclays Global Investors has won L4.7 billion and State Street Global Advisors L200 million.
Greenwich noted that 28.4% of U.K. domestic equity mandates invested by British funds are invested passively -- up from 19.7% four years ago. Passive strategies represent 25.9% of total pension assets.
Greenwich consultants also noted the growing use of specialized mandates.
While roughly the same proportion of pension funds uses specialized managers, the proportion of U.K. pension assets managed under specialist approaches has jumped to 45% from 39% last year.
The study also noted that U.K. funds have been shifting the responsibility for making asset allocations away from balanced managers.
While 39% relied on balanced managers two years ago, that figure is now just 30%.
The difference between U.K. corporations and U.K. subsidiaries of U.S. corporations is revealing: while only 28% of U.K. companies relied on internal pension staff to make asset mix decisions, 52% of the U.S. subsidiaries used internal staff.
Both relied heavily on outside actuaries or investment consultants, with responses over 60%. (Answers totalled well over 100%.)
Greenwich consultants also noted the pace of change to defined contribution plans in Britain.
They found that 24% of U.K. companies are using these plans and a further 12% plan to start doing so in the near future.
Assets in defined contribution plans have also grown quickly, reaching one-quarter of total U.K. pension assets, the study noted.
However, it is less clear which types of defined contribution plans will predominate, given the choice of hybrid schemes and expected introduction of a government-created Stakeholder Pension Scheme.