Hermes Pensions Management, which manages the assets of the £36bn (€54bn) BT pension scheme, has hired investment bank Hawkpoint to advise it on potential acquisitions.

Mark Anson, chief executive of Hermes, said: "We are interested in acquisitions and bolt-ons as well as organic opportunities." This is the first time Hermes, 100% owned by the BT scheme, which today said its pension deficit had grown to £3.4bn (€5bn), has signalled an interest in expanding its business through acquisitions. Anson is also finalising a review of remuneration at Hermes which will lead to a rise in base and performance-related pay for its team, so it can compete effectively for talent. Hermes may also offer phantom equity to managers as a further incentive. Anson said there were no plans to change the ownership of Hermes, although he may ask BT to review the position if the right deal comes up. He said Hermes had sufficient cashflow to fund deals. Pre-tax profits in 2006 will be higher than last year's £7.2m. One investment consultant said Hermes employs several talented managers, picking out its activist funds for special praise. But he added it suffers from an inability to compete for the best talent with larger fund managers. Since Anson's arrival in October 2005, several senior executives have left including James Walsh, former strategy director, Nick Mustoe, investment chief, and Charlie Metcalfe, deputy chief executive. Christopher Forster has just resigned as head of operations to become head of risk at Baring Asset Management. BT was concerned about these defections but it fully backs Anson's plan to develop Hermes into a better-rounded asset manager. If he goes on to win more third-party business, its continued support is guaranteed. If the Anson initiative fails, Hermes' future may be reviewed. The new head of pensions at BT, Kevin O'Boyle, can be relied on to take a pragmatic view. In 2001, when he was head of benefits at Marconi, he broke with the past by shifting a £1bn pension scheme bond portfolio from in-house management to Morley Fund Management as part of a derisking exercise. One investment banker said: "The biggest asset at Hermes is the contract to manage the BT scheme, which is in deficit. If BT abandoned Hermes it could easily get good terms on an investment contract with another provider, just as Philips of the Netherlands did with Merrill Lynch." BT is campaigning for the UK government to meet a pledge to guarantee its pension liabilities. If successful, its financial position would improve dramatically. Anson, former investment chief at Calpers, the Californian pension scheme, will not countenance failure. He said: "I travelled all the way over from America, with my family, to get things right." He has replaced Mustoe with Roger Gray, former head of asset allocation at UBS Asset Management; in-house candidate Nigel Labram has replaced Walsh. Nigel Webb, who used to work at Amvescap, has taken the place of Metcalfe. Hermes' private equity division plans to hire five individuals to strengthen its presence. Rod Selkirk said improvements in his department's remuneration pre-dated the Anson review. By concentrating on mid-market deals, Selkirk said Hermes can keep its edge. He added Hermes was close to hiring someone to take charge of a new infrastructure division. Hermes' activist funds continue to be well regarded in the marketplace. Hedge fund and commodities initiatives are being rolled out. Anson declined to give his acquisition strategy but said he is looking at several new product lines. He intends to hire a risk management specialist to bolster Hermes' skills in asset allocation next year.