Market moves: As the world struggles to grapple with the concept of negative oil prices, three separate analyses all urge pension schemes to focus on the risks in their strategic asset allocations.
Quarter of DB schemes suffer large Covid-19 hit
Analysis by consultancy Aon has laid bare the split fortunes of defined benefit schemes in the UK – while a quarter of schemes are likely to have seen their funding levels improve amid the coronavirus pandemic, a quarter will have seen their health deteriorate by 6 per cent or more. The remaining half of the UK DB cohort are likely to have seen either no impact or a moderate decline in funding levels, according to the consultancy. Daniel Peters, partner at Aon, said: “When schemes are looking at their investment policies in these exceptional circumstances, it is crucial that they establish that their investment risk is right-sized for the current situation. We continue to advocate high hedging levels, but also recommend schemes to review their cash flow requirements to ensure they continue to be robust in the new environment.”
Rebalancing delays could distort allocations
Pension funds may find that their risk exposures are significantly different to those planned in their strategic asset allocations following a bout of market volatility, consultancy Stamford Associates has warned. Much of the initial market pain has been felt in equities, meaning schemes requiring growth could be underweight relative to their long-term objectives. Andrew Downes, a senior investment consultant at the firm, said: “Managing a pension scheme that is inconsistent with its long-term strategic objectives threatens to derail long-term risk/reward expectations, and having such implicit (or, in our view, tactical) short-term asset allocation opinions should be avoided.”
DB schemes facing bigger losses without hedging
DB schemes without a hedging strategy would have seen a fall in funding close to 20 per cent over the first quarter, according to analysis from Insight Investment. The asset manager research showed that, assuming market index performance, a UK DB scheme hedging 70 per cent of its liability risk would have lost around 10 to 15 per cent in the same period. Jos Vermeulen, head of solution design at the company, said: “Although most of the reduction in funding levels was caused by a fall in growth assets, pension schemes would have suffered more had they not hedged.” He noted that liability-driven investment portfolios “not only provided protection against falling interest rates, but given the illiquidity experienced during the crisis it also provided a much-needed liquidity to meet pension payments, or to settle currency hedging cash flow requirements in fixed income mandates, for example”.
