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.

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