Managing cashflows? It's as easy as ABC...
27 Mar 2017 - Estimated reading time: 3 minutes
Our recent annual Trustee Barometer highlighted that only 9% of trustees recognise cashflow negativity as an issue which affects their scheme. Whilst we’re pleased to see this figure has increased from last year (when only 4% recognised it as an issue) it appears this is an area that is still not getting the recognition it needs. This is despite the Pensions Regulator highlighting the importance of cashflow planning for effective scheme management in its annual funding statement last year.
Effectively managing cashflows is a key component of integrated risk management and becomes increasingly important as schemes mature and more benefit payments fall due. With increasing numbers of members opting to transfer from DB to DC in the wake of Freedom and Choice, cashflows are becoming subject to greater disruption, and the need to manage your cashflows is ever more important. Once benefit payments out exceed contributions coming in, schemes can find themselves in the position of becoming forced sellers of assets. In a market downturn, this could lead to substantial losses.
Being cashflow negative could mean schemes may have to sell assets at a depressed price. This is a serious risk, which can lock in material losses meaning you may run out of fuel for your scheme and not be able to meet the benefits as they fall due. Our FTSE350 Pensions Analysis highlighted that 57% of schemes are already, or soon will be, materially cashflow negative. We think that many schemes could benefit by planning for this sooner rather than later. Adopting a proportionate and practical cashflow management strategy will allow schemes to rank this risk appropriately against their existing priorities.
Our ABC – Assets Backing Cashflows – approach can make sure your scheme has the assets to meet the cashflows you need today and tomorrow. By putting cashflows at the heart of your integrated risk management plan you can be sure you are never forced to sell assets when they are cheap, and you focus on secure and stable sources of income generation.
To find out more you can read our Practical guide to cashflow risk management which offers some tips on understanding the impact of cashflow risk to your scheme and steps you might take to mitigate it.