DB schemes using CDI strategy expected to rise sharply

The amount of defined benefit pension schemes adopting cashflow driven investment (CDI) strategies could increase to 73 per cent, AXA Investment Managers (IM) has found.

In a survey of trustees and consultants, AXA IM discovered that 52 per cent of schemes are already using a CDI strategy, while a further 21 per cent were considering doing so over the next year.

Cashflow negativity is becoming something that trustees need to consider as schemes mature, with 85 per cent estimated to be cashflow negative by 2028.

AXA IM head of portfolio solutions, Sebastien Proffit, noted that schemes are facing “an increasingly difficult challenge to ensure they can meet all their pension liabilities efficiently” due to cashflow negativity, “decreasing liquidity in credit markets, rising transaction costs and regulatory changes”.

He continued: “It’s therefore vital that they are putting strategies in place to have the best chance of meeting all of these payments in the future, so it is encouraging to see that the majority of schemes are thinking about the importance of CDI.

“However, it is important to remember that cashflow matching is far more complex than simply buying credit. In order to avoid becoming a forced seller of assets, schemes need to implement robust, long-term strategies that can incorporate a wider mix of assets underpinned by quality risk analysis, including – crucially – ESG criteria.”

The survey, carried out by Mallowstreet, also found that 52 per cent of schemes were targeting self-sufficiency, 25 per cent were aiming for buyout, and that none of the pension schemes surveyed defined buy-in as their endgame objective.

Larger schemes preferred aiming for self-sufficiency, with 57 per cent stating that was their aim, compared to 42 per cent of smaller schemes. It also revealed that buyouts were only favoured by 10 per cent of scheme with more than £2bn of assets.

AXA IM head of client group UK, John Stainsby, concluded: “It was perhaps surprising to see that buy-in was not a prevalent choice for small or large schemes, but the research clearly shows two obvious trends.

“One is that larger numbers of schemes are aiming for self-sufficiency as part of their endgame planning. The other is that schemes more broadly are looking at strategies to ensure they are generating predictable cashflows so they can meet their member promises efficiently and as they fall due.

“As pension funds mature, it is imperative that they focus on and define their endgame strategies. If a scheme has a self-sufficiency objective, as our research shows large numbers do, then ensuring that the cashflows are there when expected is vital. CDI can provide schemes of all sizes with the certainty they need to deliver on their long-term objectives.”

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