Sixty Second Summary
Managing net cashflow in the LGPS
03 Jun 2020
LGPS funds face a number of challenges when it comes to managing their net cashflow position. With the added volatility that the COVID-19 outbreak brings, now more than ever, LGPS funds should be getting to grips with managing cashflow.
There are a number of current challenges faced by LGPS funds when it comes to managing their net cashflow position, namely:
- Maturity - The general ongoing levels of cash needed to administer funds has increased in recent years and is expected to continue to increase as funds mature.
- Reduced deficit payment – Due to improvements in funding level and reductions in deficit, the overall level of contributions being paid into funds, on average, has fallen.
- Pre-payment of contributions - Many employers within the LGPS have been exploring the opportunity of making contribution prepayments as lump sums in advance. This may result in a more uneven pattern of cashflows.
- Private market commitments – As funding positions have improved many funds have diversified their investment strategies with increased allocations to private markets. As a result, they are managing more complex programmes of illiquid assets. Cash commitments to these markets will be drawn down in unknown lumps over the coming years as will any distributions of capital.
- Exit credit regulations - Under the Exit Credit regulations of May 2018, employers are now entitled to a refund of surplus, at the Fund’s discretion, when they cease in the Fund. Some of these exit credits can be sizeable.
- Market volatility - The COVID-19 outbreak has introduced significant volatility and reduced liquidity in markets. As a result, there is more uncertainty over levels of income, employer contributions and benefit outgo within funds. With depressed asset values, choosing where to source cash and liquidity becomes a more complex question.
- Higher death rates – Sadly, COVID-19 has led to higher than expected claims for death benefits.
In this sixty second summary, we look at:
- Understanding cashflow scenarios;
- the impact of employer contribution pre-payments; and
- what actions to take.
If you wish to discuss any of the contents of this summary further, and how to make best use of your cash flow data, please contact your usual Hymans Robertson consultant.