Cash flowing out of FTSE 350 DB pension schemes

A CASHFLOW CRISIS is impacting many FTSE 350 defined benefit schemes, a report by Hymans Robertson has found.

DB schemes are annually paying out £13bn more than they are receiving, with that figure predicted to hit £50bn PA by 2030, with half of the schemes cashflow negative.

“Given half of FTSE 350 schemes are, or are approaching, being cashflow negative, investing in assets that will deliver the income needed to pay today’s and tomorrow’s pensioners is key,” said partner Jon Hatchett. “Yet only 4% of schemes see this as a priority.”

The annual FTSE 350 pension report found that the key investment decisions made by trustees: equities; interest; and longevity risk have all “backfired”.

“Companies need to learn from the experience of the last 15 years and look for opportunities to make their schemes more resilient to risk, thereby reducing the chance of having to pay in more cash in the future or of being forced sellers of growth assets at depressed prices.”

He said a more business-like approach should be taken to managing the situation, suggesting that corporate treasurers “wouldn’t tolerate” such cashflow risk within a business.

Growth and illiquid assets should be matched against longer-term cashflows, while short term assets can pay out to current pensioners.

“Switching to an approach of having the assets to back the benefit payments – i.e. focusing on the extent and timing of a scheme’s cash needs as well as the overall return required – will make schemes far more resilient to risk,” Hatchett suggested.

“Unfortunately market volatility is the norm rather than the exception, and this approach would result in more resilient portfolios, particularly during market downturns.”

With further legislative changes to pensions taxation and increasing DB costs, he expects more closures among the two-thirds of schemes open to accrual.