Four in five (80 per cent) of pension schemes think they are likely to become cash flow negative within the next five years, according to research by PwC.

The Pension Investment and Governance Survey shows that schemes are increasingly looking towards lower risk, higher-yielding assets, leading to an increased interest in illiquid assets matching scheme cash flows. The survey of corporate sponsors and scheme trustees also found increasing allocation to liability-driven investments (LDI) and to hedge interest rate and inflation risks.

Commenting, PwC head of pension investment consulting, Sinead Leahy, said: “It’s no surprise that people leading investment strategy are thinking more closely about how their assets can be better matched to their liabilities as schemes mature.

“The survey also indicates a widespread agreement that valuation methods need to be more closely aligned to investment strategy. Just over seven in 10 respondents said now might be the time to consider alternative valuation methodologies. This is understandable given that falling gilt yields have increased deficits for many schemes highlighting the mismatch between assets and liability valuation methods.”

Furthermore, the survey also found that half of schemes still manage funding, investment and covenant separately. Nearly two-thirds feel that their current investment strategy is on track to reach full funding within agreed recovery periods, without additional support from their sponsor; and 70 per cent schemes review investment strategy at least annually. However, PwC said larger schemes (those with assets over £1bn) are likely to conduct reviews more regularly.

“Governance is clearly an area that’s increasingly under the spotlight and that will continue to be the case following the publication of the CMA’s review into of the investment consultants market. The survey suggests that of the schemes which have fiduciary management, only half conduct an oversight of their provider every year,” Leahy added.

“As the CMA recommendations begin to have an impact, we expect to see an upturn both in greater scrutiny when selecting a fiduciary manager and the oversight of these arrangements.”

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