The potential impact of the coronavirus pandemic could see pension liabilities increase by as much as 15-20 per cent. That’s according to the River and Mercantile Group, who believe the industry will be hit with the “perfect storm…in terms of funding”.
In its Interim Financial Report, the group revealed that an ongoing collapse in gilt years together with a sharp fall across global equity markets has resulted in a major increase in pension scheme liabilities of 15-20 per cent.
Even so, it also stated that high hedging levels for fiduciary clients would help protect funding levels and asset valuations from the collapse.
Despite the fact it is trying to proactively defend client asset allocations, River and Mercantile said that growth assets would inevitably be affected by the “collectively sell off”, having a knock-on effect for scheme asset and funding levels in the process.
Global conditions impacting pension schemes
“At the time of writing (12 March 2020), gilt yields have continued to collapse with 10 year gilts closing at 27bps and the 30 year gilt closing at 67bps,“ noted the report.
“To put this into context, 30 year gilt yields are down 66bps in the nine weeks since the beginning of the calendar year. This has naturally increased significantly pension scheme liabilities by 15-20 per cent, depending on individual scheme maturity profiles.
“This combined with sharp falls across global equity markets, with the FTSE100 alone down 29 per cent year to date, in many respects creates the perfect storm for long term pension schemes in terms of funding.”
Fighting to maintain market performance
River and Mercantile Group witnessed a strong return to value in its value focused equities business in the last quarter of 2019. But due to the COVID-19 outbreak, it noted a “flight to defensive quality” in early 2020 that had been “frustrating” for its value portfolios.
As the virus developed and started to affect an increasing number of countries, its impact on markets became “significant,” with the duration of the impact on the economy the “real question.”
Corrections and pullbacks were normal and should be “accepted as part of the journey,” even if it proved painful. The group also clarified that markets were capable of looking beyond current volatility.
The report added: “At some point the consequence of difficult conditions – particularly where markets sell off indiscriminately, as they are now – are a useful environment in which to identify attractive investments.
“Currently, this is a difficult one to call and as a result we are staying broadly diversified and maintaining dry powder.”
River and Mercantile Group Chief Executive, James Barham, commented: “Whilst we all face challenges in the current climate especially with the uncertainty associated with COVID-19, the market reaction and the medium-term economic impact, we have confidence in our business’ resilience and ability to continue to grow our business and to deliver for our clients.”
River and Mercantile is an advisory and asset management business with a broad range of services, from consulting and advisory to fully-delegated fiduciary and fund management.