COVID-19 hits pension scheme funding with 'perfect storm'

The impact of the COVID-19 outbreak could see pension scheme liabilities increase by as much as 15-20 per cent, as the industry is hit by the “perfect storm…in terms of funding”, according to the River and Mercantile Group.

In the group’s financial report, it stated that a continued collapse in gilt yields combined with a sharp fall across global equity markets had seen a significant increase in pension scheme liabilities of up to 15-20 per cent.

However, it added that high hedging levels for fiduciary clients would have protected funding levels and asset valuations from this collapse.

Whilst the group also stated that it was “proactive to defend client asset allocations”, it noted that growth assets would have been impacted by the “collective sell off”, subsequently affecting scheme asset and funding levels.

The report explained: “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.

“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.”

Whilst the group had seen a strong return to value in its value focused equities business in the last quarter of 2019, it noted that a “flight to defensive quality” in early 2020, prompted by the COVID-19 outbreak, had been “frustrating” for its value portfolios.

It added that the development of the virus continued to have a “very significant impact on markets”, clarifying however that “markets are capable of looking beyond” current volatility, with the duration of the impact on the economy the “real question”.

The firm emphasised that corrections and pullbacks, whilst potentially painful, where normal and should be "accepted as part of the journey".

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."

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