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Cashflow Driven Investing

CDI is changing the defined benefit pensions investment landscape.

What is cashflow driven investing (CDI)?

Cashflow driven investing is a long-term approach that seeks to help schemes increase their ability to meet their future cashflow requirements and their funding objectives.

To generate predictable cashflows, cashflow driven investing strategies select assets like high quality corporate bonds to provide stable, contractual income in line with the expected cashflow requirements of the pension fund.

Delivering on the defined benefit pensions promise

Defined benefit (DB) schemes are maturing, the amount they need to pay out is increasing and many schemes now are cashflow negative or facing the prospect of becoming so in the coming years.

This challenge, combined with ever-decreasing liquidity in credit markets and rising transaction costs means that trustees are increasingly exploring the potential benefits of adopting cashflow driven investment (CDI) approaches.

At their core, cashflow driven strategies aim to help trustees transition from accumulating funds and liability management, to meeting cashflow demands as their member promises fall due. 
 

Title More than half of UK defined benefit pensions schemes are currently cashflow negative

This figure is only set to grow as more and more schemes close to new members and mature naturally.1

Read more: DB schemes: adapting to a cashflow negative world. 

  • Mercer European Asset Allocation Survey 2019
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The benefits of a cashflow driven investing strategy

A successful cashflow driven investing strategy is one that reliably delivers predictable cashflows with the aim of paying pension benefits. According to our research, UK pension funds and their advisors see three main benefits of adopting a cashflow driven investment strategy2:

  • Investing to support alignment with the scheme’s ‘endgame’
  • Providing a cost-effective method of paying members’ pensions
  • Reducing exposure to short-term market events

Many schemes are already turning to cashflow driven investing solutions to help reduce the risk of becoming forced sellers of assets and to plan for their cashflow and endgame requirements. 

  • AXA IM CDI Survey in conjunction with Mallowstreet, 2019. 48 Pension Funds & 10 Consultants, representing over £1 trillion in assets. “Other” not included.

At the core of our cashflow driven investing solutions is our long-term Buy and Maintain credit approach

Our Buy and Maintain credit approach is a fundamentals-based, investment grade credit solution with built-in Environmental, Social and Governance (ESG) factor analysis. It aims to maximise the security of clients’ future cashflows through:

  • Capital preservation – avoiding defaults and impairments
  • Predictability – delivery of cashflows over the long term
  • Credit returns – maximising the premium over gilts

Customised solutions to meet your needs

Our cashflow driven investing approach aims to meet pension schemes’ needs for intelligent, cost-effective ways to help secure their members’ benefits; providing a flexible, capital-efficient approach for managing pension payments and balance sheet volatility.

Recognising that each scheme is unique – size, funding level, risk appetite, covenant strength, endgame strategy – we partner with clients and their advisers to develop a solution aligned to schemes’ specific positions and aims, while retaining the flexibility to adapt to market conditions and any future changes in scheme objectives.

Contact us to speak to our experts about your unique requirements.

Title We are an award-winning leader of cashflow driven solutions

In the UK and have been recognised at the Pensions Age Awards 2020. References to league tables and awards are not an indicator of future rankings in league tables or awards. 

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Award-winning cashflow strategies for UK pension schemes

 

Risks considerations for this strategy:

  • Market risk and risk of loss of invested capital
  • Risks associated with fixed income securities, including, but not limited to, interest rate risk, credit risk and liquidity risks
  • Risks linked to global investments

Investment involves risk. The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested.

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    Risk Warning

    The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested.