Raising cashflow awareness
Effective cashflow management for DB pension schemes.
Overall, it remains important not to consider cashflow management in isolation of other scheme risks, so that schemes invest to improve ultimate outcomes for scheme members.
As defined benefit (DB) pension schemes mature and become cashflow negative, cashflow management becomes increasingly important.
Schemes, particularly underfunded ones, may be better off focusing on being cashflow aware than being cashflow matched.
Being cashflow aware means seeking to use not only the cashflows from bonds, but also the natural cashflows from other types of investment such as real assets and equities. Growth asset security selection can also be shaped more closely to a scheme’s liabilities.
Cashflow awareness does not replace cashflow matching. In the short to medium term it usually makes sense to at least broadly match benefit payments. As funding levels improve, cashflow aware solutions can evolve into more precise cashflow matched solutions.
Trustees should also prepare for unexpected cashflows such as transfers out. This involves taking pre-emptive steps to boost liquidity and having a plan should borrowing or forced sales be required.
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