Royal Mail Pension Plan awards £700m equity options mandate
The Royal Mail Pension Plan (RMPP) has hired River and Mercantile (R&M) to manage a £700m (€966m) ‘structured equity’ and options mandate to implement a “more efficient and risk-focused” strategy.
The pension scheme for the UK’s postal provider had £3.8bn in assets as of the end of March 2014, with a significant focus on liability-driven investment (LDI).
R&M becomes the pension fund’s second-largest manager behind BlackRock, which managed £2.2bn in LDI solutions.
R&M’s structured equity solution uses a selection of options and fixed income products to create synthetic exposure to equity markets, with volatility management in place for downside protection.
The pension scheme had more than 9% of its assets in global unconstrained and emerging equities and close to 12% in corporate bonds, but the majority of its allocation (53.8%) is in index-linked bonds, as per its LDI mandate.
The pension scheme has a history of strong derivatives usage in both its return-seeking and liability-matching strategies.
In 2013, the scheme had 24.5% of its assets in swaps for economic exposure but later extended this to 56.7% in swaps and total returns swaps and 21.8% in repos.
The bespoke strategy for RMPP, R&M said, was designed in conjunction with the pension scheme and based on time-frame and return objectives set by the scheme rather than manager discretion.
R&M described the fee structure as being at the “passive end of the scale”.
Ian McKnight, CIO at RMPP, said the strategy was part of the scheme’s “risk-mitigation investment strategy”.
“We are constantly seeking new ways to drive and manage returns on behalf of our members in the most efficient and risk-focused manner possible,” he said.
James Barham, global head of distribution at R&M, highlighted the significance of the appointment, which adds to its nearly £10bn in derivatives assets under management in both structured equity and LDI.
The pension scheme returned 3.4% over the year to March 2014, with a 6.3% from the return-seeking assets portfolio.
RMPP transferred a significant amount of its liabilities to the UK government prior to the privatisation and listing of its sponsor, Royal Mail.
The scheme was left fully funded after a £2.7bn IAS 19 deficit was wiped out, with the government assuming responsibility and recently announced a £1.2bn increase to this surplus.
The government also assumed a large section of its assets – most notably real estate, most of which was later sold to the Santander UK Group Pension Plan.
R&M was formed after the merger of equity house River & Mercantile Asset Management and derivatives manager and investment consultancy P-Solve in 2014.