Sponsored article


driven investment (CDI) strategies that are tailored to their cash- flow requirements, allowing room for any uncertainties. That will help produce the income that they need — especially if their pen- sion funds are already (or will soon become) cash-flow negative.


Key considerations In designing a strategy, three key elements should be considered. The charts below show sample CDI strategies, which vary depending on endgame objectives. First, the endgame strategy. Each long-term funding and invest- ment objective, including the current funding ratio on which they are based, and the respective timescale to full funding, should drive the design of the CDI solution. Second, the design. Any good CDI solution must consider factors such as the trustees’ and sponsor’s risk appetite, liquidity needs and certainty of cash-flows. Most CDI strategies would comprise assets with contractual cash-flows, such as government bonds and buy-and-maintain credit. However, especially if there’s a pension deficit, there should be appetite for assets that produce cash-flows with a high degree of certainty but may not be guaranteed. These could include quality global equity income assets that have low vol- atility and pay healthy dividends.


Buyout 15% 10% 50% 30% 30% 5%


Liability hedging assets Multi-Asset Credit


Cash Equity income


Buy-and-maintain bonds Emerging market debt


5%


Asset-backed securities Private debt


Self-sufficiency A 5% 10% 40%


10% 10%


10% 10% 5% 5% 40%


A well-designed CDI solution enables trustees and sponsors to adopt a thorough integrated approach across investment, funding and covenant. The investment strategy, along with the assessed strength of sponsor covenant, should determine the appropriate discount rate for liability valuations. Higher yielding assets, reflected in discount rates, would help ease the funding burden. Finally, there are implementation considerations. It is important for all parties to consider how they manage key pension and investment risks associated with the sponsor, assets and liabilities. For example, there could be unanticipated changes to sponsor sol- vency, interest rates and inflation expectations. Precise matching is not viable, especially when there is cash-flow uncertainty due to, inter alia, liability management exercises (such as transfer incen- tives to members or pension increase exchanges) and buy-ins.


2020 and beyond Coupled with the backdrop of the dismal outlook for interest rates in the UK and the eurozone, strategies focused on generating income need to be a key feature for DB pension funds in 2020 and beyond. The result should be an increase in certainty of returns, reduced funding level volatility and cash-flow needs being met as DB pension funds approach their endgame.


Self-sufficiency B 10%


Source: Janus Henderson Investors


Important Information


This article is intended solely for the use of professionals, defined as Eligible Counterparties or Professional Clients, and is not for general public distribution. Janus Hender- son Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Manage- ment S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Janus Henderson, Janus, Henderson, Perkins, Intech, Alphagen, VelocityShares, Knowledge. Shared and Knowledge Labs are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.


March 2020 portfolio institutional roundtable: Fixed income


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