Bromley mulls 10% illiquids allocation as cash flow worsens

The scheme’s investment subcommittee is currently debating whether to invest around £60m – half of its fixed income allocation – to alternative assets in order to meet longer-term liabilities.

This follows a calculation by the scheme’s actuary that it will turn cash flow-negative at around 2020/21, according to the agenda of its August meeting.

Defined benefit schemes, which remain open, are increasingly looking at illiquid investments to boost returns and diversify away from other fixed income assets.

Martin Reeves, principal accountant at Bromley, said: “The fixed income piece is all around protecting our assets and trying to earn something that is roughly the equivalent of the amount by which our liabilities will grow over time.” 

The £629m scheme originally agreed to revise its investment strategy in February 2012, to be implemented in three phases, following poor investment performance during 2011-12.

It maintained its 80:20 split between growth and protective assets, but split its growth assets between diversified growth funds (starting at 10 per cent of its overall portfolio) and global equities (70 per cent).

“The main move was towards global equity mandates, which means that the fund managers which won these portfolios are no longer constrained by regional allocations,” said Reeves.

In November last year, the investment subcommittee had agreed that 20 per cent of the scheme’s assets be allocated to global fixed income pooled funds.

But a member of the subcommittee questioned whether this allocation was too high, given the greater returns he felt could be achieved through other investments, according to its August meeting agenda. 

Data from Financial Times service MandateWire showed that while fixed income attracted the most money from European investors last year, alternatives won on future allocations as schemes looked to derisk and diversify portfolios.

When stripping out Bromley's investment returns the fund became cash-flow negative in 2012-13, according to projection carried out by its actuary, and this position is expected to deteriorate.

In a report prepared for the subcommittee, the scheme’s adviser said: “It seems logical therefore for the fund to consider making part of that change when assets are still available at rates of return which appear attractive and which give the fund some much-needed inflation proofing against its longer-term liabilities.”

The scheme was 82 per cent funded at March 31 2013, down from 84 per cent at the time of its previous actuarial valuation in 2010, according to the scheme’s statement of investment principles. 

Timing your investments 

Lee Dodds, partner at consultancy LCP, said greater investment in alternatives is “the direction of travel” for many schemes, meaning illiquid and private forms of credit have come to the fore.

However, he added: “You probably want to have some stable pool of assets that you can use to meet this cash flow.” This can push people away from less liquid forms of assets, Dodds said.

Alan Collins, director at consultancy Spence & Partners, said active DB schemes may be becoming cash-flow negative as fewer people join, perhaps due to “prohibitive” contribution levels in recent years.

But he said schemes reviewing their investment strategy should avoid expensive disinvestment costs by reviewing the timing of expected income. Trustees should also get a clear picture of upcoming retirements, transfer requests and early retirements, Collins said.

“What you might be able to do for schemes of a certain size with dividend income from your benefits, rather than reinvest that you could receive the income into the fund to part meet the benefit outflow [for] the pensions payments,” said Collins.