Introduction
Many UK employers have opted to provide defined contribution (DC) pension arrangements for their workers. This has led to the closing of existing defined benefit (DB) pension schemes to new members and future accrual, stopping inflows of new money.The net cashflow of many DB pension schemes has fallen significantly because of cuts to the supply of employee and employer contribution payments with respect to accrual (a principal source of income). Closed and maturing schemes are also affected by new options for lump sum payments and transfers out made available to scheme members since recent pension reforms.
The combination of these trends has led many schemes to become cashflow negative. This means the amount paid out to members each year exceeds the amount the scheme receives in annual income from pension contributions and investments. Some 73% of UK schemes are currently cashflow negative. This figure is expected to rise over the next 10 years.1
If cashflow negative pension schemes do not have a plan, in time, they will be forced sellers of assets. Being reactive means schemes are exposed to market conditions and transaction costs at the time of selling, leading to unreliable outcomes.
A cashflow driven investment (CDI) strategy aims to provide a reliable solution to this problem as part of a holistic investment plan.