For many years pension schemes have been trying to balance the conflicting objectives of generating the required level of return (and hopefully more) whilst also minimising the risk of the funding position falling. More recently a third objective has had an increasing role on the investment stage; meeting cashflows out of schemes.
"Deficits aside, contributions are no longer being received to meet the pension payments out."
The past ten years have seen a succession of defined benefit (DB) schemes closing to future accrual (over 34% of all DB schemes are closed to accrual compared to 12% in 2006) and schemes are now much more mature (almost 40% of members of DB schemes were pensioners as at 31 March 2015). This means that, deficits aside, contributions are no longer being received to meet the pension payments out. Another source must now be found to bridge this gap.
This paper looks at how much weight should be given to this third objective – meeting cashflows – when designing an investment portfolio and if there are specific features cashflow negative schemes (i.e. schemes where outgoes exceed income) should look for in their investments.
To continue reading, please find the full report available below.