Negative cash flow becoming the norm
A recent survey of UK Defined Benefit (DB) schemes, commissioned by Buck Global Investment Advisors (BGIA), reveals the urgent need for more efficient cash flow management. According to the findings almost one third of DB schemes already expect to be cash flow negative this year, a trend which is expected to continue to rise.
Major structural inefficiencies are common place
Yet despite this cash flow challenge, when contributions can be insufficient to meet benefit payments, schemes are often failing to manage cash flow effectively, increasing the cost of pensions provision. Almost one third of respondents whose schemes are expected to be cash flow negative in 2013 do not currently draw down investment income to meet the net cash flow requirements, preferring to disinvest or hold large amounts of cash.
Costly leakage of returns through excessive cash holdings
In particular, 25% of respondents are holding more than 10% of their assets in cash, thus forfeiting potential investment returns on this portion of their scheme’s portfolio. Taking this statistic into account, BGIA estimate the average cash holding in DB schemes, held to meet benefit payments, at more than 5% of total scheme assets. With total UK pension fund assets estimated at £1.7 trillion last year, this indicates that over £85 billion of DB pension scheme assets can currently be assumed to be out of the market. This represents a total loss of £6 billion per annum in investment returns.
Large number of schemes not monitoring associated cash flow costs
A surprising 25% of respondents also admitted to not being aware of the costs they are incurring when liquidating their scheme’s investments to meet benefit requirements. While those remaining respondents may be monitoring the absolute costs of transacting, they may not be considering on a relative basis, the opportunities for meeting cash flow in a more efficient, and less costly, manner.
It is vital that schemes look to manage their cash flow by drawing down on their investments rather than continually selling holdings and accumulating numerous costs.
Solutions for efficient cash flow requirements
Commenting on the increased importance of cash flow management amongst UK Defined Benefit schemes, Steven White, Managing Director at Buck Global Investment Advisors, stated: “Inefficient cash flow management is prevalent within the pension fund industry. The survey results highlight that there are considerable opportunities for pension schemes to put arrangements in place to manage their cash flow requirements more efficiently. Tailored cash flow solutions can deliver significant benefits to pension schemes and provide major support in ensuring they pay their future payments.”
Steven White concluded “Solutions exist to enable pension schemes to overcome the considerable drag on overall returns that can occur by managing cash flows poorly. These solutions represent the low hanging fruit essential to helping schemes meet their future liabilities.”
Methodology
The survey was commissioned by Buck Global Investment Advisors (BGIA), the investment arm of Buck Consultants, an advisor to small-medium sized UK pension schemes. BGIA gathered insights from trustees and sponsors, representing 50 UK Defined Benefit pension schemes, with assets ranging in value from less than £50 million to over £500 million. Each respondent was interviewed anonymously between the dates of 6 May 2013 and 7 June 2013 and the study was conducted by UK-based CoreData.
|
