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Pension funds are failing to manage cash flow effectively

25 July 2013

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Almost one third of defined benefit (DB) schemes already expect to be cash flow negative this year and the trend is expected to increase, according to the findings of a survey of UK DB schemes.

The survey, commissioned by Buck Global Investment Advisors (BGIA), has revealed that despite the cash flow challenge, schemes are often failing to manage cash flow effectively, and are then increasing the cost of pensions provision.

BGIA found that 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.

According to the survey, 25% of respondents are holding more than 10% of their assets in cash, and taking this statistic into account, BGIA estimate the average cash holding in DB schemes, which are held to meet benefit payments, are at more than 5% of total scheme assets.

With total UK pension fund assets estimated at £1.7tr last year, BGIA said that over £85bn of DB pension scheme assets can currently be assumed to be out of the market, which represents a total loss of £6bn per annum in investment returns.

Steven White, BGIA managing director, said: "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."

The survey, which gathered insights from trustees and sponsors representing 50 UK DB schemes with assets ranging from £50m to over £500m, also revealed that 25% of respondents admitted to not being aware of the costs they are incurring when liquidating their scheme's investments to meet benefit requirements.

BGIA said even though 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.

The investment adviser said that 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.

White said: "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."

First published 15.07.2013

monique_simpson@wilmington.co.uk