The impact of credit risk for pension plans engaging with CDI

Cashflow-driven investing (CDI) has gained significant traction in recent years as pension plans have successfully de-risked and strengthened their balance sheets over the last decade. Increasing numbers of plans are able to allocate significant proportions (potentially all of their assets) to fixed income like assets so that cashflow income closely matches expected liability payment, thus providing a simpler hedge and reducing the complexity of portfolios. Investment products, strategies and asset classes have developed to facilitate this approach.

Recent events have only served to increase the applicability and relevance of this approach. Recent market volatility has seen pension scheme funding levels significantly improve despite asset price falls and the yields available on CDI strategies look significantly more attractive. Furthermore, the recent draft DWP pension regulations (Occupational Pension Schemes (Funding and Investment Strategy) regulation 20231), points schemes firmly towards a ‘low dependency investment allocation’. This is defined as one where the assets of the scheme are invested in such a way that the cash flow from the investments is broadly matched with the payment of pensions and other benefits under the scheme – this is CDI.

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Supporting documents

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