The mallowstreet Cashflow Driven Investing Indaba
Pardon the Interruption
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This morning we hosted the Cashflow Driven Investing (CDI) Indaba. (What is an Indaba, you ask? It is an important conference held by the great leaders of the Zulu people. The term comes from a Zulu word meaning ‘business’ or ‘matter’ and aims to draw on the power of collective wisdom).
The ability to generate cash to meet pension payments is one of the growing challenges for defined benefit pension schemes – and categorically one that requires the focus of our collective wisdom.
The majority of DB schemes entered 2021 in a cashflow negative position, with the money coming from contributions less than the amount being paid to retirees. This trend is set to continue, with more schemes experiencing the same shortfall. Given that COVID-19 and its associated consequences will likely remain prevalent throughout 2021, where and how will pension funds access assets that can help build a comprehensive and robust CDI strategy?
Lok Ma, solution specialist at Willis Towers Watson, opened the Indaba (while taking questions along the way), outlining key principles in CDI:
- Contractual income
- Avoiding concentration risk
- Sustainable investing
- Higher yield vs higher security
- Funding Considerations
- Liquidity needs
- Operational aspects
- What about insurance?
We then heard from John Van Reenen, Professor at the London School of Economics and a Digital Fellow at the Massachusetts Institute of Technology, who helped explain how the economy arrived at the point where we are today.
He argued that innovation and diffusion are the keys to rekindling our economies and defended the idea that a focus on growth should be central to our plans to rebuild and renew; and most importantly, that we should use COVID as an opportunity to reset.
Nick Horsfall, Managing Director at Redington, then took the stage to share his insights into the current economic risk on CDI, the need to embed ESG within CDI, and the opportunity for CDI within DC pensions.
Interspersed with these keynotes were three excellent masterclasses:
- Secure income assets in CDI strategies: Why consider commercial ground rents in a post-COVID-19 world? (Alpha Real Capital)
- CDI is broader than you think (Invesco)
- Cashflow-driven investing (CDI) in a post-COVID-19 world (PIMCO)
Finally, we were joined by Ben Gold (XPS Pensions Group), Natalie Winterfrost (Law Debenture) and Nadeem Ladha (20-20 Trustees), who shared their insights and experience and took questions from the audience. Some of the key questions that came up were:
- As pension funds adopt more CDI strategies and increase investments in secure income assets, will we face availability / crowding out challenges?
- Are there any disadvantages to notionally splitting assets between CDI to match pensions in payment and riskier assets for the balance, transferring assets to CDI as members retire?
- There are pooled buy and maintain funds available. Why should we not use these to build a CDI portfolio, especially when the cashflows can be variable? Would this not keep things simple?
- There have been a lot of comments about pension schemes going down the buyout route, but what about other ‘endgames’ and how would it impact the construction of a CDI strategy to align it with self-sufficiency / low dependency or even a consolidator route?
The day flew by, and I know we were unable to get to every question in each session. Thank you so much for everyone who joined us – I am keen to hear what questions you still have that remain top of mind. Please post these here, as well as your observations and reflections from the day.
