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Many ways to deal with negative cash flow positions

David Curtis
David Curtis outlined three ways to deal with negative cash flow situations.

Although cash flows in aggregate are generally moving toward a negative position across the globe, individual markets deal with the issue in different ways.

David Curtis, London-based head of institutional business, U.K. and Ireland at Goldman Sachs Asset Management, said while there is a lot of work going on in the U.K. on the topic, “surveying the rest of the world (shows) it is a problem coming rather than a problem that has arrived.”

That doesn't mean pension fund executives across the globe aren't considering their options to manage negative cash flows. He said there are three ways to approach it: through a dedicated approach, with cash flow matching; rebalancing, with executives selling down a portfolio when cash is due and typically rebalancing to a policy benchmark or strategic asset allocation; or by seeking higher asset returns. The latter is driven by nuances in regulatory frameworks, he said.

The picture across Europe is varied. Sweden, Norway and Denmark-based pension funds are “substantially well-funded, and because of that it is an observation but not a problem. The idea you can sell assets to meet cash flows is a more acceptable one,” said Mr. Curtis. A lesser-funded plan will still worry about being a forced seller.

Mr. Curtis highlighted Finland as a market where the cash-flow-negative problem will eventually arise. He cited the €18.5 billion ($19.9 billion) state pension fund VER, Helsinki, which in 2015 noted it will reach peak negative cash flows of €500 million annually by 2030.

“This is starting to affect their thinking,” said Mr. Curtis. However, under the Finnish system, the full burden of meeting these cash flow requirements will not fall on the state fund itself.

“Whilst they can see it as an issue, it is not one that gives them a great deal of discomfort,” he added. Timo Viherkentta, CEO at the fund, could not be reached for comment by press time.

In Germany, pension funds will typically meet cash flows via strategic asset allocation and rebalancing of portfolios, with pension funds selling assets that have gone up more than their strategic benchmark. However, Mr. Curtis said the issue there is one of drops. “If everything is going down it is a more difficult action to take as assets may have to be sold at a loss, when ideally the timeline for a positive investment return may have been longer,” he said.

An example of a regulatory approach can be found in Switzerland, which has a hybrid system. “They have to offer a guaranteed return on assets,” said Mr. Curtis. “The issue of low return and yield environment ... mean there has been a move toward seeking higher returns by adding asset classes that can outperform traditional markets.”

The regulatory framework also offers other options. “In particular, because risks can be shared with both employer and employee, schemes can modulate the level of payout, so negative cash flows aren't necessarily a problem as less may be distributed in the future,” said Mr. Curtis.

This article originally appeared in the February 20, 2017 print issue as, "Many ways to deal with negative cash flow positions".