Articles - Cannibals in the age of Covid19


Ever heard the expression 'a pension might eat itself'? A bright colleague of mine coined this a while back. It was a warning. A warning that the risk of delivering a good member outcome is bigger when your outgo is greater than your income. You start to run out of time for your assets to bounce back from a financial crisis. This warning led to the rise and rise of CDI and drawdown strategies – to avoid being a forced seller of assets. The guiding principle remains sound.

 By Calum Cooper, Partner at Hymans Robertson
 Recent events are a stark reminder to be practical and lively about it.
  
 Why?
  
 Well, just imagine you’ve fine tuned a wonderful portfolio of assets to precisely match your income needs. You did this in peaceful financial times. Then along comes COVID-19. Solvency deficits have increased for UK DB by £200bn in less than a month. And there is an acute shortage of cash in all pockets of society. In fact, the following storm of cashflow disruptions happen:
     
  1.   LDI. Rates volatility goes through the roof and LDI mandates require extra capital.
    2.  
  2.   FX. The £ falls in value and FX hedging requires more collateral.
    3.  
  3.   Income. Income distributions on secure income assets switch off as they are sold down.
    4.  
  4.   Payroll. Administrators require additional cash to manage the risk of staff absence.
    5.  
  5.   Credit. Default risk rises, as the world faces the possibility of a sharp recession.
    6.  
  6.   Contributions. Corporates hunker down cash – they look to defer deficit contributions, future service contributions and expenses.
    7.  
  7.   Outgo. Unemployment rises and people need cash, scammers are drawn to this like the Sirens and there is an uptick in transfer values and early retirements.
 Just 2 months ago this would have sounded implausible, right? But, suddenly the whole cashflow landscape has changed. We’ve seen all but the above happen and Outgo is a real risk depending not least on how member communications are handled.
  
 So, the current environment is a great reminder of what’s important when it comes to strategy and multi decade pensions. It is far more important to be broadly right and adaptable than precise and inflexible.
  
 That’s all very well for the future. But what should schemes be doing, now?
 Revisiting your cashflow risk management plans across all of 1-7 above in a broadly right and adaptable way is key. Stay close to your sponsor and their developments and thinking, particularly as I reflect on recent sponsor led discussions on various cash deferrals. The shared goal is to ensure that member outcomes are protected through this difficult spell. Delivering this will require teamwork. All whilst recognising the environment is fluid.
  
 This is clearly not business as usual. Unmanaged, the cash needs of the pension scheme end up cannibalising their pensioners’ financial future.

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