Think like an insurer, invest like a pension scheme

Cashflow-driven investing (CDI) is about meeting the outcome that matters most to pension schemes – being able to pay out liabilities as they fall due.

The approach involves investing in assets that generate predictable cashflows that can be used to match liabilities whilst still having the potential to generate attractive returns. This approach leads to more certainty of outcome in comparison to a traditional approach that concentrates on returns from growth and matching assets (a ‘bar-bell’ approach).

In practice, it means building a portfolio of highquality investment-grade debt and debt-like assets that, after allowing for expected defaults, is designed to match liabilities and generate returns. Liability-driven investing (LDI) is also used as part of the strategy to fill in any remaining gaps between the asset and liability profiles.

The approach has been favoured by insurers for years; Now pension schemes are also considering and implementing it.

Including private assets in CDI can provide a yield uplift through illiquidity premia, as well as other benefits such as diversification and downside protection when compared to public markets. Until recently, these assets were the domain of larger pension schemes with significant governance budgets. Now they can be accessed by schemes of all shapes and sizes; there are single and multi-strategy pooled funds available, as well as bespoke solutions.

This paper describes the private debt assets that might be suitable for CDI, and considers how pension schemes can make the most of today’s opportunities in this competitive market.

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Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency exchange rates. Investors may not get back the original amount invested.

Illiquidity risk

Where funds are invested in illiquid private assets, investors may not be able to redeem any units in the fund when they want because illiquid private assets may not always be readily saleable. If this is the case we may defer a request to redeem units.

Credit risk

Bond values are affected by changes in interest rates and the bond issuer's creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (“Aviva Investors”) as at 4 December 2018. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The investments mentioned within this video are intended to be for illustrative purposes and should not be considered as investment recommendation.

The information contained in this document does not constitute explicit or implicit actuarial advice.

Issued by Aviva Investors Global Services Limited, registered in England No. 1151805. Registered Office: St Helen’s, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority and a member of the Investment Management Association. Contact us at Aviva Investors Global Services Limited, St Helen’s, 1 Undershaft, London EC3P 3DQ.