Trustees have yet to prioritise cash management despite the fact that half of FTSE350 defined benefit (DB) schemes are turning cash flow negative, according to Hymans Robertson.
The consultancy's State of the trustee nation 2016 research which combined figures from three recent surveys found despite 50% of FTSE350 DB schemes being already at or close to being materially cash flow negative, just 4% of lay trustees said their own schemes were in this position.
This is compared to 39% of independent trustees which said schemes they advised were in this position where outgoing benefits materially outweigh incoming contributions.
Hymans Robertson said these figures suggested the issue of cash flow negativity had not yet been brought to the attention of trustees.
The figures came from comparing results of the firm's FTSE350 Pensions Analysis report, Trustee Barometer and Independent Trustee Survey reports that were published last year. The Trustee Barometer respondents consisted of 100 lay trustees while the Independent Trustee Survey featured 23 independent trustees. Combined, these respondents had responsibility for over 100 schemes, some of which would have been from FTSE350 companies.
Hyman Robertson partner and head of trustee consulting Calum Cooper said: "Trustees are not placing enough focus on cash flow management of the schemes they're involved with.
"The fact that overall many trustees didn't highly rank the need to focus on income and cash flow requirements to drive strategy is, we believe, a cause for concern."
The research also revealed a stark difference between the views of lay trustees and independent trustees on how to tackle an increasingly cash flow negative scenario. Of the 100 lay trustees, 21% said they would do nothing, 38% would pursue more liability-driven investing (LDI), and 26% would seek further diversification. Just 8% said they would put more emphasis on generating income and 6% would switch to less volatile assets.
By contrast, independent trustees had a very different approach with 32% recognising more focus on income generation. Another 32% said schemes in trouble should seek lower volatility assets, and just 5% and 7% recommended further diversification or LDI respectively. ,
Almost three quarters (72%) of lay trustees said a fire sale of assets remained a low risk, with 21% putting their schemes at medium risk, whereas two thirds (64%) of independent trustees believed there was a low risk and 36% considered it a medium risk.
The report concluded the issue of cash flow negativity must be reported to trustees going forward. Hymans said trustees should have a clearer sense of strategic objectives and measurable long-term plans to build an effective risk strategy.
Hymans Robertson reported in 2015 that FTSE350 defined benefit (DB) schemes paid out £13bn more than they received in contributions last year, raising the risk they could be forced to sell assets at depressed prices.
How trustees can reduce their scheme's income imbalance:
- They could take regular distributions from assets which produce income, rather than letting it accumulate within the mandate.
- They could structure the portfolio so that contractual cashflows - such as interest and redemptions from fixed income investments - meet the scheme's income gap.
- They could invest a higher proportion in assets with less volatile valuations - cash is the ultimate low volatility asset and can have a role to play as part of a balanced portfolio.
Defined benefit (DB) schemes that provide GMPs must revisit and, where necessary, top-up historic cash equivalent transfer values (CETVs) that have been calculated on an unequal basis, a landmark court judgment said last week.
Regulators must act now to impose some "proper regulation" to stop another defined benefit (DB) transfer advice disaster, saysTim Sargisson.
Opportunities for defined benefit (DB) schemes to pursue investment approaches that help repair the UK’s economy cannot stand in the way of improving member outcomes, Aegon says.
More members transferred out of defined benefit (DB) pension schemes in October after September's record lows while values were surprisingly stable, according to XPS Pensions Group's Transfer Watch.
Joanna Smith says trustees will need to accurately identify if covenant issues are short-term affordability concerns, or the start of more material deterioration.