Paying pensions

Cashflow aware investing

Cashflow aware investing is an investment philosophy designed to help pension schemes meet their cashflow requirements by aligning and allowing for the cashflows received from their asset portfolios.

As pension schemes mature and close to future accrual, they are increasingly reliant on using assets, rather than contributions, to meet outgoing payments. One way to meet these payments is simply to sell assets as payments fall due. However, there can be benefits to taking a more pro-active approach that can be adapted to suit a scheme’s individual investment journey. For mature schemes, cashflow matching can be a useful tool, but for those schemes that are earlier in their journey and seeking higher levels of expected return, a cashflow aware growth approach may be more suitable.

Introducing cashflow awareness at LGIM

Graham Moles, Head of Portfolio Solutions, and Toby Orpin, Senior Active Credit Solutions Distribution Manager introduce cashflow awareness at LGIM.

Cashflow matching

Cashflow matching – using contractual income to pay expected liabilities – is an important tool that helps give schemes more certainty around the timing of income they can expect to receive from their asset portfolios. These portfolios typically adopt a buy and maintain credit strategy, where bonds are held to maturity in most cases. For schemes with specific requirements, a bespoke approach is often necessary.

LGIM has significant scale and experience in implementing and managing bespoke cashflow matching portfolios efficiently for defined benefit (DB) pension schemes. With our longstanding insurance heritage, we also manage our own group capital for the annuity fund on behalf of L&G Group. We can deliver both pooled and bespoke solutions.

Cashflow aware growth

Bonds are not the only assets that pay an income. In fact, almost all asset classes pay a stream of cashflows. Schemes may wish to focus on generating sustained cashflows over the longer term by investing in a diversified mix of assets. However, there is typically a trade-off between the certainty of the cashflows and the expected returns of the asset.

Cashflow aware growth strategies can be useful for schemes looking for a greater expected return than can be achieved from cashflow matching alone. At LGIM, we have access to a wide variety of asset classes to achieve this such as global high yield bonds, emerging market debt, or equities (dividends). Cashflow aware investing looks to combine features from both cashflow matching and cashflow aware growth.

Related investment capabilities

Buy and maintain credit

The management of the underlying fixed income portfolio forms a key part of any successful cashflow matching strategy.

Real assets

Including an allocation illiquid assets that pay contractual cashflows, as part of a wider cashflow matching solution, can also be a way of increasing diversification and/or expected returns.

Real Assets