Pension schemes must start building their de-risking strategies now as more schemes transition into run-off, according to J.P. Morgan head of Europe Middle East and Africa pensions solutions, Sorca Kelly-Scholte.

Speaking at the Pensions and Lifetime Savings Association's Investment Conference today, 8 March 2018, Kelly-Scholte said that the challenge is facing pension schemes now, and that they “must start looking at strategy through a cash flow lens, explicitly, now”.

According to research by J.P. Morgan, 24 per cent of schemes are currently cash-flow positive, 29 per cent are in a transitioning phase and 47 per cent of schemes are in a run-off.

Kelly-Scholte said: “The issue has crept up on us, why didn’t we see this coming? Why is this a challenge now? … It’s like trying to fill up the bathtub with the plug out.”

In an audience poll, 52 per cent of the attendees believed that their pension scheme would enter a cash-flow negative state in the next five years, even if they account for investment income.

When asked about how they expect to service cash-flow, 36 per cent said they have a cash-flow driven investment strategy in place compared to 24 per cent of the attendees that said they haven’t developed a specific strategy and 15 per cent said they planned to increase investment income, over 24 per cent who planned to sell assets.

“It’s not something that happens over night and it is the type of portfolio that takes time to build, it’s not something to say I’ll do that in the future once i'm fully funded and can afford to do so.”

“I think we need to start building it now because we have the deficit right now and we need to service cash-flow”, added Kelly-Scholte.

Babcock International Group investment committee chair, Roger Boulton, added that schemes can create more liquidity in their schemes by paying member benefits.

He said: “We have always expected to pay out benefits, but not from a negative position.”

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