In recent months, Cashflow Driven Investment (CDI) has very much been the “talk of the town”. But for every voice in the pensions industry, there seems to be a different version of what CDI actually means. Whilst there is a general consensus amongst investors of the overarching principle of CDI; to hold low-risk assets which provide reliable income allowing schemes to meet their obligations without becoming a forced seller of assets, we find significant differences in many important areas.
CDI portfolios can be grouped loosely into two main categories: credit focused and secure income focused. The former focuses on investment and sub-investment grade credit assets which are simple to implement but tend to provide low yields. Secure income focused strategies invest in long-term, illiquid assets which provide higher yields but are more complex to manage and can potentially hinder near-term buyout plans.
For pension scheme Trustees, there are a number of considerations when deciding whether to adopt a CDI approach and the conclusions to these discussions will differ on a scheme by scheme basis. Is it preferable to match all or just a portion of future pension payments? Should the scheme adopt a low risk strategy which provides more reliable cashflow matching or a higher risk approach? Is CDI appropriate given the size of the scheme? These are some of the important questions Trustees should be asking when considering a CDI mandate.
For schemes which are well-funded but not yet in a position to buy out in full, CDI can be seen as a transitional phase, until a full buyout becomes possible. Despite CDI being described as ‘DIY insurance’ due to its similarities to the insurance regime, in most cases, CDI leads to a lower risk route to buyout rather than replacing a buyout altogether.
Learn more about CDI by downloading the full article.
| Title | File Type | File Size |
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| Cashflow Driven Investment: Ultimate solution to the pensions problem, or just glorified liability-driven investment? | .7 MB |
