Nearly three in four of the UK’s defined benefit (DB) pension plans are now cashflow negative according to the 2019 Asset Allocation release and report, published by Mercer.

The world’s largest institutional investment adviser has found that 73% of DB plans in the UK are cashflow negative, up from 66% in 2018.

Among the other findings of Mercer’s 2019 report:

• 64% of European Union (EU) and UK schemes are cashflow negative. Of the 36% of plans that remain cashflow positive, 72% expect to become cashflow negative within the next 10 years
• The challenges of being cashflow negative mean assets need to be properly managed in order to meet cashflow and collateral needs
• 91% of surveyed schemes disinvested assets as a way to meet cashflow requirements
• Sustainability is gathering momentum among European institutional investors with 55% now considering environmental, social and governance (ESG) risks in their schemes, up from 40% in 201

The way forward

“Strong equity returns in 2017 and rising yields in 2018 have helped many DB plans to move closer to their endgame,” commented Matt Scott, investment consultant at Mercer. “Investors should consider developing a strategy to meet cashflows, to avoid relying solely on disinvestment which can be complex and expensive.

“We believe that cashflow matching techniques, where portfolios are specifically designed to align income and principal receipts, will be more widely adopted in the coming years, as DB plans continue to mature.”

Jo Holden, UK chief investment officer at Mercer, added: “While 2019 has so far been marked by cautious optimism, investors need to be very aware of an ever-evolving macro-economic and political backdrop.

“Mounting evidence of overextension of credit, possible liquidity implications as central banks rein in their market involvement, and continuing political fragmentation, all mean investors should consider effectively positioning their portfolios to weather possible market volatility.

“We expect the increasing focus on sustainability to continue and anticipate it will soon be seen as an integral part of investment idea generation and risk management.”