Pensions schemes should be avoiding speculative risks and ensuring that strategies are in line with target allocations due to uncertain markets caused by the coronavirus outbreak, according to XPS Pensions Group.

It stated that, although there is no simple answer to how to respond to the changing market conditions, schemes should take a balanced approach to risk management and take a longer-term perspective.

Avoiding speculative risks and making sure scheme strategy is in line with target allocations “is a good place to start”, noted the firm, but added that this is “not a reason to take risk off the table”.

“Rewarded risk is the driver of long term returns and the current market concern reflects the most legitimate of rewarded risks – economic uncertainty,” XPS stated.

The increase in coronavirus cases has led to global equities and gilt yields falling, with funding levels being dented as a result.

Earlier this week (3 March), Hymans Robertson analysis found that defined benefit pension scheme deficits has risen by around £100bn due to the impact of the outbreak.

XPS warned that, as the infection rate continues to increase, the detrimental economic impact is likely to rise “at an alarming rate”.

Commenting, XPS CIO, Simeon Willis, said: “The current uncertainty surrounding coronavirus is forcing investors to think hard about their current risk exposures.

"Whilst we don’t think this is a reason in itself to take risk off the table, schemes need to be confident that their portfolio is where they want it to be  speculative risks are to be avoided.
 
“With central banks poised to take further action if needed, a key area is to check the liability driven investment (LDI) hedge – to see if it is fit for purpose in protecting the scheme.

"There could be merit in looking to increase the level of hedging or increase the quality of the match. This is particularly true given the RPI consultation due to begin next week.”

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