Not the end of the world

But while a bank clerk might recoil at the sight of a bank account being depleted, pension fund managers and trustees should not lose their cool when a scheme turns cash flow negative.

As the article about the London Borough of Bromley pension fund shows, even local authority schemes are grappling with the issue of negative cash flow.

Paying out more in pensions than is received in contributions is part of the natural evolution of a maturing pension scheme, experts say; the trick is to put a plan in place that means assets do not need to be sold when they cannot or should not be, for example when markets are low.

People might also be overestimating the impact of a shrinking balance on a scheme. Barnett Waddingham’s Graeme Muir said turning cash flow negative is not the end of the world: while a scheme will lose some flexibility around the timing of its investments, this risk can be mitigated by investing for income.

Pension schemes might also want to take a closer look at how charities handle their assets. Yes, they invest over a longer term – for eternity in principle – but they also pay out comparatively large percentages.

But although the art of using up a pension fund’s assets will become ever more relevant as defined benefit schemes mature, DB assets on the whole still have a long way to go before they start to shrink, as Magnus Spence explains in his article.

The bulk of pension assets continue to be DB, with defined contribution still catching up. Even in a market like Australia, DB assets are growing.

In comparison with DB, DC schemes are in their infancy, and this often shows in the way they are invested. The freedom and choice reforms have pushed schemes to change their default funds, as the Prudential scheme has done.

But those that have not yet adjusted their default fund must do so now. While assets might be lower – for now – in DC, the membership is growing fast, making a good accumulation strategy crucial for millions of savers.