The Reuters pension trustees have agreed to “income optimise” their liquid credit mandates so that distributions are periodically paid to the trustee bank account rather than reinvested. Can thinking about share classes help schemes as they turn cashflow negative? 

 

The pension trustees of Reuters – the UK news agency – decided to switch its credit mandates from accumulation to distribution in March last year, which affected the Stone Harbor Emerging Market Debt fund, the TwentyFour Dynamic Bond Fund, the LGIM Buy and Maintain Credit fund and the CQS MultiAsset Income Fund.  

 

The scheme will see less cash coming in as its sponsoring employer, Refinitiv Limited, closed the fund to future accrual from 31 August 2022. The affected members joined the London Stock Exchange Group Pension Plan, a defined contribution plan, on 1 September 2022.  

 

Reuters’ Canadian parent company Thomson Reuters sold Refinitiv to the London Stock Exchange Group in January last year. As part of the deal, the financial pension obligations of the sponsoring employer have been guaranteed up to a maximum value of £700m. 

 

 

The Reuters trustees are not the only ones whose cashflow is now centre stage. Schemes are increasingly looking to match their outgoings from investments as their funding improves and they close to accrual. This gradual pivot will direct investment returns away from asset managers and into trustee – and ultimately pensioner – bank accounts. 

 

Clive Gilchrist, trustee executive at Bestrustees, has seen two schemes switch share class to distribution, saying he would expect it to become more widespread as schemes mature.  

 

However, “some asset managers have been slow to appreciate this trend and have not yet organised distribution classes for their bond funds, which historically have been accumulation funds”, he says. 

 

For schemes, another way to achieve the same result is by doing pensioner buy-ins, he notes. “When schemes do a buy-in of a proportion of their liabilities... they receive monthly payments from the insurer to fund the pension payroll, but the assets they sell to fund the buy-in may well have been accumulation funds,” he observes. 

 

Duncan Willsher, a trustee director at 20-20 Trustees, agrees that schemes can benefit from using distribution share classes. 

 

“Accumulation funds have always been in the investment managers' best interests, but many schemes would benefit from reduced transaction costs and anywhere between a marginal and material improvement in operational ease for the trustees, if they made greater use of distributing share classes,” says Willsher. 

  

Some schemes seek to match their expected cashflow requirements to a portfolio of assets that generate those cashflows precisely, he notes. “Thinking about where your cashflow is being generated in your portfolio and how you can most efficiently harvest it can make a real difference to your bottom line,” he adds. 

  

However, asset managers have not been standing idly by, coming up with new products to serve the growing demand for cashflow matching investments which range from cashflow-driven investments to infrastructure. 

 

“In continued efforts to hold on to your money for as long as possible, investment managers have been developing new cashflow generating funds for many years,” says Willsher. “By their nature, many of these new funds and assets also have strong ESG foundations, further helping trustees tackle their investment challenges.” 

 

 

Becoming cashflow negative was historically considered by many schemes to be a significant turning point for the scheme, but the reality has always been that being cashflow positive or negative has little to do with financial health of a scheme, observes Simeon Willis, chief investment officer at XPS Pensions Group.  

 

“If anything, cashflow negative schemes often tend to be more financially secure because one of the reasons they are cashflow negative might be that they are not receiving deficit repair contributions as they are sufficiently well funded,” he notes, saying that being cashflow negative is not even particularly related to scheme maturity – a concept the government and the Pensions Regulator are focussing on in the new DB funding regime. 

  

The primary benefit for income share classes is reducing transaction costs, he says, both for equity and fixed income investments. “Accumulation units are helpful in a practical way when you don’t need cashflow, and income share classes are useful when you are distributing income, as you don’t incur costs on the income being generated by the underlying holding,” he explains. 

 

Willis stresses that income share classes do not reduce risk, however, and that “they are not in themselves more secure or better at matching liability cashflows than accumulating share classes”. To change these aspects, a scheme would need assets that earn a contractual income, he advises.