Cashflow negative DB schemes growing

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5 Jun 2017

The majority of the UK’s defined benefit (DB) pension schemes are cashflow negative,  research has discovered.

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The majority of the UK’s defined benefit (DB) pension schemes are cashflow negative,  research has discovered.

The majority of the UK’s defined benefit (DB) pension schemes are cashflow negative,  research has discovered.

Mercer has found that 55% of such schemes are not generating enough cash to pay their members, up from 42% last year. The problem is set to get worse, with 85% of those currently cashflow positive expecting to generate insufficient cash for their needs by 2027.

In response, schemes are turning to higher yielding, but less liquid assets to generate the cash they need. Average allocations here were only nudged up to 22% from 21% last year, but far above the 4% recorded in 2008.

Mercer’s global director of strategic research, Phil Edwards, said: “Being cashflow negative is a natural life stage of a mature DB pension scheme, of course, but recent stock market performance may have lulled some into a false sense of security,” he added.

“Our report highlights that less than 40% of schemes have a formal de-risking journey mapped out. This leaves a large body of schemes with no clear plan in place.”

Edwards advised trustees of cashflow negative schemes to ensure that, in the event of a market correction, liquidity is available to meet cashflow and collateral needs without having to sell assets.

“We would encourage all schemes – large and small – to use scenario planning and stress-test analysis to understand how a market correction might impact their financial health,” he added.

More than 1,200 institutions in 13 countries were questioned for the survey, which also found that de-risking among schemes is continuing.

Equities averaged 29% of allocations in 2017, slipping from 31% a year earlier. Bond allocations moved in the other direction to 49% from 48% as scheme sought to take advantage of improving bond yields.

Edwards said the consensus is that portfolios dominated by equities, credit and government debt offer an unattractive risk-return profile in the future.

“Whilst hedge funds have faced a challenging post-crisis environment, with falling volatility reducing the potential for generating alpha, institutional investors have, in the main, retained their allocations in recognition of the valuable role they can play in portfolios,” he added.

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