From the blog: The balance of payments for defined benefit pension schemes has shifted. With estimated active DB members numbering less than 500,000 and more than 5m members in receipt of their pension, most DB schemes have a negative cash flow.
As contribution receipts dwindle and payrolls increase, administrators, trustees and investment consultants are working more closely than ever to ensure cash management policies keep the treasury wheels turning.
Two fundamental starting points to consider are the acceptable level of deposit cash, commonly held at very low-interest rates, and how quickly access to top-ups can be obtained.
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As contribution receipts dwindle and payrolls increase, administrators, trustees and investment consultants are working more closely than ever to ensure cash management policies keep the treasury wheels turning.
Historically, active cash management has never been an issue for administrators. Large, regular deficit reduction receipts and predictable, steady outflows made the process of forecasting cash requirements relatively simple.
Walking the tightrope of maintaining prudent cash balances, while not introducing unnecessary delays or blocks, is a delicate balancing act
Over recent years, however, the lumpy cash demands placed on schemes through the uptake in transfer activity and the drive for schemes and their sponsors to provide more attractive cash options, such as pension increase exchange, has made predicting the future much more difficult.
When you combine this with reducing contribution inflows, it means that getting an effective and robust cash management process in place has become a much more demanding task.
Cash flow management often ignored
While schemes focus on investment cash flows to retain adequate liquidity over the long term, much less consideration is given to the mechanics, process and policies that provide access to cash when administrators have a call on it in the short term.
Two fundamental starting points to consider are the acceptable level of deposit cash, commonly held at very low-interest rates, and how quickly access to top-ups can be obtained.
Once baseline cash deposit limits and drawdown protocols are agreed, administrators can start building a picture of the short and medium-term cash demands; at which point even more decisions need to be made.
It is important to think about the events that form part of the cash flow projection, and what delays or waiting periods you are willing to impose on members when cash starts to run low, as these could impact efficiency and perceived confidence in the scheme.
Avoid forced selling
Walking the tightrope of maintaining prudent cash balances, while not introducing unnecessary delays or blocks, is a delicate balancing act.
Trustees and their consultants can also encounter an investment headache. Limiting or stipulating the frequency and maximum value of disinvestments are two of the most common supply-side restrictions placed on cash accessibility.
Close cash management is as important for pension schemes as it is for businesses. With negative cash flows now the dominant experience for DB schemes, planning how frictionless access to cash is governed should be on every administrator’s agenda.
Toby Clark is client relationship manager at Trafalgar House Pensions Administration
