Havering creates £2m cash buffer to pay benefits

Local authority schemes have been affected by reduced membership due to job cuts and outsourcing, meaning fewer active members joining and less cash coming into the fund.

More schemes are harvesting income from their equities to pay current benefits, but managers have warned of the longer-term negative impact this can have on returns.

“We had a situation where our cash flow was negative,” said pension fund accountant Debbie Ford. “We never had enough cash in the fund.” 

The overflow is currently funded by income the £403.5m Havering scheme gets from property and equity holdings, but has to be topped up with employer contributions

The scheme is planning to start drawing down income from its bond holdings next year, when it resets its investment strategy – and is reluctant to draw down further from assets ahead of its March valuation.

Ford added: “What we are not sure is whether it is going to disadvantage the bond manager, not having the additional income.”

Investment data have shown that taking income out of traditional growth assets such as equities, rather than reinvesting it, can harm returns over time (see graph).

Ian Barnes, head of UK and Ireland at UBS Global Asset Management, said harvesting equity returns for a short period might not have a big impact, but will start to harm real returns in the long term.

“When you start using equities for income, you are really asking way too much of them,” he said.

“The fundamental benefit is members will definitely get their pension paid,” said Barry McKay, partner at Hymans Robertson. “But longer term, hopefully this whole approach would achieve good, strong investment performance while mitigating effectively the risk of losing capital.”

He added: “You would be more at risk of losing capital if you have a more staid strategy, because market conditions change, equities start to fall and the managers have less scope to do anything around that.”