LONDON -- Trustees of the soon-to-be-launched L17.9 billion ($28.6 billion) Post Office Pension Plan intend to invest up to 3% of the fund in private equity in order to boost returns.
The Post Office recently unveiled plans to merge its two defined benefit schemes, the 15.5 billion Post Office Staff Superannuation fund and the 2.4 billion Post Office Pensions Scheme, in order to enhance returns and adopt a more aggressive investment policy.
The Post Office plans' trustees and the plan sponsor have not yet given final approval to the exact asset allocation structure of the new plan, to be launched in April. But a target asset allocation, based on a study by Watson Wyatt Worldwide, Reigate has been approved, said Gerry Degaute director of finance for Post Office Pensions Trustees Ltd., London. He would not give details of the target allocation.
The two funds use 10 managers, four of which are shared. No decision has been made yet on manager changes.
The asset allocation is unlikely to vary greatly from the current arrangements with each fund. The mature POSS has 50% of assets invested in U.K. equities and 26% in overseas equities, with the balance of the fund split among property, fixed income and index-linked securities. Less than 100 million of the fund is invested in private equity with Hermes Investment Management Ltd., London.
"We are considering if we should increase that for the new fund, but we would go no higher than a maximum of 3% of assets. If we went into high-yield bonds it would be a small exposure, and the jury is still out on hedge funds," said Mr. Degaute.
The younger POPS plan is slightly more aggressive in its equity exposure, with 52% in U.K. equity, 33% in overseas equities, 3% in property, 9% in fixed income and 3% invested in index-linked securities.
POSS was closed to new members in 1987 and is considered a "super-mature" plan made up largely of pensioners, said Dermot Courtier, Post Office director of pensions strategy.
POPS was set up in 1987 and has a fast growing membership of active employees. Without the merger, POSS would have had to increase its exposure to fixed income, which might have retarded capital growth in the plan, he said.
Little change foreseen
The merger gives the new plan access to a wider and growing pool of assets in which to invest. But the manager mix is unlikely to change dramatically from current arrangements, said Mr. Degaute.
Hermes Investment manages nearly 75% of the assets in a mix of equity, property and fixed-income mandates held by the two funds and has had a close relationship with the trustees since 1995, when the Post Office sold its 50% stake in the money manager to British Telecommunications PLC, London.
The other managers are:
* Mercury Asset Management Ltd., London, which runs roughly 1.4 billion combined in U.K. equities for both schemes;
* Schroder Investment Management Ltd., London, with mandates from both plans totaling nearly 1.9 billion in overseas equities;
* Fidelity Pensions Management, London, which is responsible for around 250 million total from both plans in Pacific (ex-Japan) equities;
* Wellington Management International, London, which runs a roughly 250 million portfolio of U.S. large-capitalization equities for POSS;
* UBS Brinson Ltd., London, which runs a 100 million mandate in U.S. equities for POPS;
* Morgan Stanley Dean Witter Investment Management Ltd., London, which runs a 100 million mandate in Pacific (ex-Japan) equities for POSS;
* Lazard Asset Management, London, which is responsible for a 100 million mandate in European (ex-U.K.) equities for POPS;
* Foreign & Colonial Management Ltd., London, which runs a 100 million portfolio invested in U.S. small-cap equities for POSS; and
* State Street Global Advisors U.K., London, which is responsible for a L100 million mandate from POSS in indexed U.S. small-cap equities.
"We may rationalize the managers but it is not clear at this stage if we will decrease, increase or retain the same number of managers," said Mr. Degaute.
A defined contribution plan also will be launched in April, said Mr. Courtier.
That scheme is likely to attract between 3,000 and 5,000 members in the next three years and is aimed at staff who have opted out of the defined benefit plan or who work on short-term contracts.
Index manager Legal & General Investment Management Ltd., London, will run the investment options, and members will have a choice of three investment vehicles, graded according to investment risk.
The merger of the defined benefit plans was two years in gestation and has the full agreement of employees and members, said Mr. Courtier. This is at a time when some British plan sponsors, such as Ford Motor Co. and British Airways PLC, have had difficulties with U.K. plan members over scheme mergers and benefit changes.
He said the Post Office wanted to get staff and member approval before going to the trustees. But to get the support of staff representatives -- namely the Communication Workers' Union, the Communication Managers' Association and the National Federation of Post Office and BT Pensioners -- the Post Office had to agree to some potentially expensive benefit changes to POPS.
The Post Office agreed to convert the POPS plan to a "balance of cost" arrangement, where the employee's contribution is fixed and the plan sponsor makes up the difference. As a result, POPS member contributions were capped at 6%.
The Post Office also agreed to freeze, at L3,328, the integration off-set, where the sponsor deducts some or all of the value of the basic state pension -- currently L3,471 for a single person -- from the occupational pension.
Mr. Courtier would not say how much the compromise had cost the company in additional benefit payments.