‘Black Swan’ events like 2022’s gilt crisis, highlighted the importance of cash flow, but as disruptive market events become the new normal, schemes must remain vigilant.
Pension schemes today are investing in a time of elevated market volatility and disruptive ‘Black Swan' events. The crisis last year was predominantly focused on liquidity, but nevertheless, it caused schemes to look at how they are managing their cashflows.
But are they doing enough given that one year after the crisis, 83% of trustees in our survey believe market disruption and macroeconomic instability will continue?
Over half of respondents state that cashflow has become a more important topic for their scheme over the past 12 months. The journey to endgame, and ensuring schemes hold sufficient assets to meet future obligations to beneficiaries is the biggest concern and it continues to rise.
Indeed, more than 50% of schemes that are less than fully funded are looking to cashflow-driven investment (CDI) strategies specifically over the next five years. This becomes an even bigger focus as schemes are increasingly paying out significant cashflow to pensioners from scheme assets which may have fallen materially in size.
Currently, 28% of schemes surveyed have adopted CDI. A further 18% are intending to following last year's gilt crisis - and this figure rises to 27% for schemes that are not fully funded.
This could be a concern for schemes for several reasons. Firstly, many schemes have been investing for growth in illiquid assets, which as we saw in last year's gilt crisis has increased schemes' vulnerability to market downturns and forced them to become asset sellers if they turn cashflow negative.
Secondly, given the current high interest rates, the impact on levered growth portfolios could also increase the need for liquidity if there is a higher requirement for collateral. According to one accredited trustee interviewed for the survey, there are several reasons why CDI should be considered by schemes.
To learn more about how schemes are approaching CDI and where the strategy fits on the journey to endgame, complete and submit the form below (this page will automatically redirect to the report and in addition it will be emailed directly back to you).