River & Mercantile highlights 'golden' pension opportunities amid Covid-19

Pension schemes who are ready to proceed with bulk annuities could have a “golden opportunity” amid the current pandemic, River and Mercantile has said.

The firm highlighted that despite increased uncertainty due to economic turmoil stemming from Covid-19, increased market capacity and widening credit spreads meant that those schemes ready to proceed could potentially achieve “a great deal”.

The discussion around bulk annuity opportunities was part of a broader series of discussion and articles by the group, focusing on key issues that schemes and trustees are facing amid the current pandemic.

As part of this, the firm has also highlighted opportunities in the investment space, including the potential for broader improvement in defined contribution (DC) investing following the pandemic.

In particular, the firm highlighted that whilst DC investments have historically been low cost, passive equity, members with this default arrangement have had “a really tough time so far this year”.

It added that the pandemic should be used to “evaluate what can be done better in a post-Covid world”, and that pushing to drive better DC outcomes was "certainly" something that should be added to this list.

The firm explained that after the Covid-19 pandemic, it would expect many DC schemes and master trusts to consider their investment strategies “a little more closely”.

It emphasised: “Passive global equities, which served so well through most of the 2010s has failed DC investors through Covid.”

River and Mercentile also highlighted that given the recent volatility, many schemes have “drifted from their strategic asset allocation”, and will be considering whether to rebalance back to target.

The firm clarified that while for some schemes and implementation arrangements, such as some external fiduciary solutions, re-balancing could be an automatic arrangement, this may not be appropriate in current circumstances.

River and Mercantile solutions co-head, Ajeet Manjrekar, explained: “Whilst this may reduce the governance burden on trustees, we believe it is still important at this time of heightened uncertainty to examine more closely the decisions being taken.

"This is particularly prevalent if the impact of the current crisis worsens causes risk assets to plummet further.”

Equally, the firm noted that almost every scheme will be keen to take advantage of the opportunity to “capture the bounce”.

Manjrekar added however, that timing the entry point would be a challenge, particularly given the current market conditions, and that on-risk assets could still have further to fall.

The firm stated that schemes might consider holding cash and short-dated gilts as an interim measure, while preparing to invest in emerging opportunities once the markets stabilise.

It explained that this would be a “more robust course of action” from an investment consulting and fiduciary management perspective.

“Furthermore,” Manjrekar continued, “maintaining higher cash balances to support pension payroll in this time of uncertainty represents many schemes' top priority."

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