In the face of ongoing market disruption, pension schemes cannot afford to overlook their cash-flow strategies.
Over a year on from the gilt crisis, pension schemes today are still investing in an age of ongoing market disruption and ‘Black Swan' events.
While the crisis in 2022 was predominantly focused on liquidity, it forced schemes to reassess how they are managing their cashflows. As the value of UK government gilts fell, yields increased, and schemes were forced to look at their liabilities in closer detail. In our survey, many trustees admit that they were prompted to take a closer look at what their schemes were invested in.
Yet today, as we lurch from crises to crises, how well are schemes equipped to absorb vulnerabilities in their strategies and are they doing enough to better manage cashflow?
Our survey of DB pension scheme trustees explored the rise of strategies such as cashflow driven investing (CDI) to manage liabilities reflects trustees' efforts to manage risks and plan for endgame. Indeed, over half (56%) of respondents stated it has become a more important issue for their scheme over the past year
In particular, the journey to endgame, and ensuring schemes hold sufficient assets to meet future obligations to beneficiaries is the biggest concern and this has risen. For example, more than 50% of schemes that are less than fully funded are looking to cashflow-driven investment 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.CDI is also well-suited for well-funded pension schemes, as there is naturally less reliance on generating higher returns.
That is not to say CDI is not appropriate for schemes with lower-funding levels - and there are many ways a CDI strategy can be implemented. In recent years, the availability of pooled pension vehicles has made CDI much more accessible for smaller schemes too.
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).
