Defined benefit (DB) pension scheme trustees have been advised to view cashflow-driven investment (CDI) as the “toolkit” to address challenges posed by turning cashflow negative due to a maturing membership.

Aviva Investors head of DB solutions, Toby Baldwin, noted that the aggregate UK pension book is at a “crossroads” as the majority are closed to new and existing members.

“As a result of that, the membership profile is maturing quite rapidly, which shifts the focus away from accumulation of assets to decumulation,” Baldwin told the Pensions and Lifetime Savings Association (PLSA) Investment Conference 2021.

“Schemes are turning cashflow negative, which brings with it a new set of challenges. CDI can be viewed as the toolkit to address some of these new challenges that that brings.”

He added that, prior to the pandemic, schemes had enjoyed a “relatively favourable run of market conditions” since the financial crisis, particularly if using liability-driven investment (LDI) to protect against the falls in interest rates.

“Funding levels have generally improved, making lower-risk strategies such as CDI more affordable.,” Baldwin said. “The number of schemes in surplus on a Pension Protection Fund (PPF) basis has increased materially, meaning that there are many schemes for whom CDI might now be a realistic option, whereas in the past that might not have always been the case.”

For schemes that are looking to buyout in more than five years, CDI is a strategy that “they should be looking at” in terms of helping them get to the point where they are able to execute the buyout, Baldwin added.

He continued: “For schemes that are looking to be self-sufficient then again a CDI strategy is really the prefect strategy for that, because that is running your pension portfolio like an insurance company runs its annuity book.

“There might be subtle differences between the two approaches depending on your endgame. A scheme that is looking to run in self-sufficiency for the foreseeable future might have more appetite for illiquid assets within their CDI strategy because they know they are not going to need to liquidate those assets in the medium term.

“Whereas a scheme that is perhaps looking to buyout in five to 10 years may still have some appetite for illiquid assets but less appetite, because they will need that liquidity when it comes to transacting the buyout.”

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