Hybrid schemes

Hybrid schemes, incorporating features of both the oilier schemes, have be­come fairly common in the USA, but were rare in the UK. However, in July 1996, Glaxo-Wellcome introduced the first combined final salary and money purchase scheme offered by a major company in the UK, following a merger of the two companies. Existing employees will have a choice between the two schemes, with an option to swap; new employees will have to join the money purchase scheme, although they can switch into the final salary scheme at the age of 40. The 'sponsors' of the schemes are a merchant bank for the defined benefits scheme and the Equitable Life Assurance Society for the de-lined contribution scheme.

Unit trusts

Unit trusts are long-term investment products sold by managers to investors, often with charges of up to 5% of the purchase price. Investors in unit trusts are usually private people but, from Tables 2.4 and 2.5, it is apparent that insurance companies had £29.9bn invested in unit trusts at the end of 1994. In many cases, these investments were in unit trusts which the companies managed. Managers of unit trusts are specialist companies, such as M & G or Save and Prosper, or banks and insurance companies: they play an active role in selling the units to investors, investing the proceeds and finding the cash to repay investors wishing to withdraw (sell their units back to the managers). In addition, there is always a second financial institution involved in a unit trust - acting as trustee and holding the investments (assets) on behalf of the unit-holders (as investors are called). The advantages of unit trusts are prin­cipally that risks arc pooled and that specialist managers should enhance investors' returns.

There are more than 1,400 unit trusts, with one manager sometimes run­ning 10 or more unit trusts. In the USA, managers often permit 'switching' between unit trusts in the same group - known as a 'family of funds'. This term is little used in the UK, where a different practice has evolved - a ‘fund of funds', which is a unit trust which invests in a number of other unit trusts, often but not always from the same group. In December 1994, the assets of unit trusts totalled £87bn. but greater sales of units to investors, and rising prices for their investments had increased the value of assets to well over £120bn by April 1996.

Unit trusts are 'open ended' funds, i.e. if investors buy more units, then the managers issue more units and buy more assets: if investors sell back their units, the managers have to repay the sellers from their cash balances, cancel the units and, possibly, sell some of the long-term investments to top up the short-term assets.

Unit trust prices are published by the managers, who calculate them from the market values of the shares held by a trust divided by the number of units in existence. Hence, a fall (rise) in the price of a unit is due to a fall (rise) in the prices of the shares which the unit trust owns. At present, managers quote two prices - bid and offer - for their units, but it is planned to introduce single pricing soon.

The assets of unit trusts are shown below. Note that the short-term borrowings are shown separately, unlike the data for insurance companies and pension funds.

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