Why cashflow driven investment is changing the pension investment landscape

Interview with Sebastien Proffit, Head of Portfolio Solutions, Fixed Income, AXA Investment Managers.

Sebastien Proffit, CFA is responsible for AXA IM’s fixed income portfolio solutions globally. He leads a dedicated team of strategists embedded within local investment teams, which partner with institutional clients to design, optimise and manage bespoke solutions, tailored to their needs.

How is the defined benefit pensions market evolving?

In the mid-2000s, when liability-driven investing (LDI) was in its infancy, the issue of whether to hedge unrewarded risks such as interest rates and inflation was strongly debated across the UK pension scheme market.

In a pre-LDI world, when pension schemes were open and growing, the focus was
on investment returns and asset growth. But as they started to close, LDI moved from the margins into the mainstream, and today is much more commonplace in investment strategies. The focus therefore was onto balance sheet management.

Strong movements in equity markets, increased transfer activity, and changed longevity assumptions have since led to a significant improvement in funding positions.

Many pension schemes have started to move their primary objective away from maximising returns, to safeguarding their assets. More than half, at 56%, of UK pension schemes are currently cashflow negative, and of those that are not, 49% are expected to become so over the next five years. Therefore the cash they generate from their investments – as well as scheme members’ contributions – is lower than the amount they need to pay out as pensions.

This scenario has been exacerbated by schemes being closed to new members, which in turn has reduced the amount of money coming in. But this environment has brought cashflow driven investment (CDI) strategies into focus, with income statements now rivalling traditional balance sheet management for prominence.

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