The move is indicative of a wider switch among pension funds away from active fund management into trackers - funds which aim to mirror the performance of the FTSE All Share index.
For Hermes Liberty it is the biggest mandate won since the company was set up last year as a joint venture between Liberty International and Hermes, which manages the Post Office and British Telecom pension funds.
Sainsbury's said it had become concerned about the dominance of a few major players in the UK index-tracking market, and was therefore pleased to be backing a comparatively new entrant. At present the market for indexing is served almost exclusively by two players, Legal & General and BGI (part of Barclays).
Adrian White, deputy chief executive of Hermes Pensions Management, said the ability to compete in tracking management was largely driven by size. Hermes is able to provide alternative management systems to the big two as it already manages the Post Office and BT pension schemes on this basis.
The mandate is also unusual as it has been awarded on a fixed cash fee basis. In active fund management, fees are becoming increasingly performance related, while tracker funds have tended to charge a percentage of the funds under management. That means the fee rises and falls with the index.
Sainsbury's decision is another blow to Mercury and other houses specialising in stock selection, a form of investment known as "active management".
All four of London's big active fund managers have failed to match the rise in the stock market in recent years. Several turned bearish, wrongly in the event, while others targeted poorly-performing sectors.