There is nothing like a turbulent market for people to realise that they need to manage cash-flow and liquidity better. Celene Lee, Buck


challenging is that in this box you can probably have three to five asset classes.


Schemes that follow a CDI strategy tend to be more mature and better funded. Therefore, what they want is lower governance, not managing three to five types of fund, but somebody who is good at managing each asset class. Kwatra: An interesting aspect about using private debt within CDI is that you can negotiate or structure the deal at the outset to cre- ate the cash-flows you need. For example, housing associations regularly issue 25- or 30-year bullet bonds, but on the private side you can negotiate something slightly shorter and amortising that is perhaps a better fit for your liability and credit risk profile. Visavadia: That’s an interesting point. I always worry about that in private debt because while the income flows it is not always pre- dictable as to when it comes in. So it is good to hear that you can amortise these opportunities on a more predictable way. Kwatra: That’s one of the attractions of private debt. It is not just about the illiquidity premium. There is also an opportunity to tai- lor an asset to fit the profile you require as an institution. Visavadia: Is that opportunity available to smaller schemes? Kwatra: It is a function of your buying and negotiating power and your ability to transact. In addition, it is also a function of how will- ing the issuer is to meet in the middle ground.


PI: Is it better for an institutional investor to be cash-flow aware or cash-flow matched? Visavadia: There is no right answer. If you have a well-funded scheme on a short journey to buyout then a cash-flow matched position might work very well. If you have a less mature scheme the longer end of the investment becomes quite challenging. The opportunities may not be there to fully match it, but just being


aware of it and a partial match would be just as good, in my opinion. Bews: We should remember that pension scheme liabilities change every three years. So, there is redundancy in matching very close- ly, particularly at the longer end. Every scheme should be cash- flow aware and have some idea of what their cash-flows are and of their plans to meet them.


The more mature schemes can try to be cash-flow matched, but li- abilities change and being 100% cash-flow match is not necessari- ly in any scheme’s best interests. Weeks: I cast my vote for cash-flow aware. The variations are con- siderable, so you need to be aware. As for matching, that is more a matter of fine judgement. Key factor in these considerations is what is the strength of the employer’s convenient. Our members say that employers are re- serving their position. They have the opportunity of having more flexibility from The Pensions Regulator and they are working out how that might apply in practice. Fullerton: If you are a pension fund with only pensioners then you can be more reliant on the liability profile and be more matching with your cash-flows. But for schemes with non-pensioners, the li- abilities are sometimes changing daily. With pension freedoms and bulk transfers, it is difficult to predict what the cash-flows are going to be over the next six months. So some form of cash-flow awareness and accessing sufficient cash-flows, slightly more than you need if you can afford it, is pref- erable. Keep refining those cash-flows and reinvest if you need to. There are, of course, risks but there’s no point being precisely cash-flow matched when there are so many uncertainties, espe- cially when most of the liabilities are based on actuarial assumptions.


April 2020 portfolio institutional roundtable: CDI 13


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