LONDON -- Barclays Global Investors Ltd. has agreed to pay back a portion of its management fee to plan sponsor J. Sainsbury PLC Pension Scheme if the firm exceeds its agreed tracking error limits for a new 100 million (U.S.$158 million) index mandate.
Sainsbury is believed to be one of the first U.K. plan sponsors to implement such a tracking-error fee.
BGI will benchmark 60% of the portfolio against the recently launched FTSE Multinationals index. The remaining 40 million will be managed against a version of the FTSE All-Share index, excluding multinational companies.
BGI agreed to pay back a portion of its management fee if the portfolio exceeded the agreed limits during a period of two years, said Geof Pearson, secretary to the 2.9 billion plan. He would give no further details.
BGI officials did not return calls by press time.
The move is part of an attempt by Sainsbury to review its manager agreements and implement penalties for managers that underperform or miss their investment targets.
Mr. Pearson previously had told Pensions & Investments he particularly wanted to implement penalty fees for active managers, and he acknowledged the arrangement with BGI was not the penalty arrangement he had hoped for initially.
"What we are really after is that if the manager goes outside the tracking error, we get a deficiency payment," or a fine, he said.
The plan did not use a tracking error rebate arrangement for a 50 million U.S. Treasury inflation-protected securities mandate awarded to Philips & Drew, London.
Striking a deal with a passive manager was an easier option as the firm is far less likely to break tracking error limits than an active manager. Mr. Pearson said he would have had difficulty getting the plan's assets managed if he had tried to implement such an arrangement with all of its managers.
Consultants said margins for passive management are extremely tight in the current competitive market. They suggested BGI had agreed to the rebate to ensure it won the business.
