Kwatra: From an insurance perspective, we are forced to be more cash-flow matched rather than just cash-flow aware. The PRA tests will force us to be absolute or duration matched within certain tolerances.


I can understand that for pension schemes, whether you are cash- flow aware or cash-flow matched, depends on individual circumstances. Flexibility is needed to cope with changing assumptions and liabil- ities, as previously mentioned. Even if you have a cash-flow matched buy and maintain strategy, it should not be a set and for- get strategy. As market and credit conditions change, you might want to engage in some relative value trading, whether to uplift the yield slightly on your portfolio or to buy into better quality names. It’s important in a cash-flow driven strategy to make sure that you have enough liquidity to employ that flexibility – for example, by not being invested in too high a percentage of illiquids. Lee: I see cash-flow aware and matched being the same thing, but on two ends of the spectrum. If you are precisely aware, then you are cash-flow matched.


I have schemes that are less mature, have a growth-orientated strategy but are cash-flow negative, which is quite unusual. I would put them in a cash-flow aware category, not because they don’t believe in cash-flow matching, but because their overall port- folio risk and return profile requires them to have a high growth content but also manage cash-flows. They are in a halfway world where they have not chosen to be cash aware, but it’s where they happen to be because of their overall circumstance.


PI: Most defined benefit pension schemes are working towards an endgame and that seems to be typically a buyout. If the markets


don’t recover quickly from the current disruption will it impact those plans? Visavadia: From my experience, it is nice to have a goal, an ambi- tion and a target. I just worry that we may not necessarily get to our goal because, bearing in mind that if all schemes in the UK want to do the same thing, by the time you get to the goal will the pricing be right. I just have a question mark in my mind. At the moment, I don’t see the target period lengthening for those schemes which are on a journey path. They are already invested in it and have to run it out to make sure that they manage the risk in the process. No new strategies are being implemented because the situation is volatile. Fullerton: There are a range of scenarios, but schemes that are ful- ly hedged on interest rates and inflation, are reasonably well fund- ed, cash-flow matched and are targeting buyout in five years or so are probably sitting relatively pretty.


I saw a survey recently that said roughly a third of pension schemes are targeting buyout, but most pension funds are targeting self- sufficiency. Many sponsors cannot afford to stump up the extra cash to buyout. At this point in time when they are cash-flow strapped, and markets are in turmoil, these companies are work- ing with trustees not towards buyout, but targeting something that is more affordable and low risk. Lee: People often talk about having a target buyout in X number of years, but the reality is that while it is good to have a plan, the world will evolve the way it will evolve and you may not get to where you want to be because of circumstances outside of your control. For example, I have heard people say that you can target buyout in five years if you take more risk. Can you imagine if six


A lot of the investment cases for issuers have been particularly challenged and have sometimes changed.” Kunal Chavda, bfinance


14 April 2020 portfolio institutional roundtable: CDI


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