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What can trustees do if they’re feeling a cash squeeze?

We’ve all heard the expression cash is king. And there’s some truth to that, particularly in a crisis.

Most pension schemes hold a small amount of cash in the trustee bank account. The amount they hold is typically sized to cover near-term pension payments plus a buffer to cover some ad-hoc or unforeseen expenses. When cash balances run low, trustees top them up by:

  1. Using contributions from the sponsor
  2. Using income from the investment portfolio like coupons on bonds, distributions from properties
  3. Selling investment assets to raise cash

There are a few reasons cash management is becoming more difficult for some schemes.

Difficulties could arise from demands for cash as well as sources of cash. On the demand side, there’s some anecdotal evidence there’s been a recent increase in:

  • Transfers out, acceptance of ETV offers, lump sums at retirement
  • As members, themselves, put a premium on near-term cashflow
  • Perhaps exacerbated by anxiety about security of their benefits or health of the sponsor

On the sourcing side:, I spoke earlier about using investment income or selling assets. Some sources of income could slow or stop. For example:

  • Some private equity and credit funds could slow their distributions
  • As they defer the sale of assets, by choice or necessity
  • Some property funds have already been suspended, turning off income for investors

In terms of selling investment assets, there are two potential difficulties

  1. Many assets have fallen significantly
  2. Equities are down 20% YTD and corporate bonds are down 7-10%
  3. So selling these assets would crystallise the loss
  4. Liquidity has deteriorated
  5. Making it harder and more expensive to sell some asset

So what can trustees do if they’re feeling a cash squeeze?

I wanted to share two ideas with you.It’s possible they have already occurred to you:

The first idea is to sell equities and ask a manager to recreate exposure using derivatives

In practice you would:

  • Sell shares or units in equity funds
  • Receive proceeds in cash which you can use to meet your requirements
  • Simultaneously, ask a manager to recreate or synthesise equity exposure
  • Likely using vanilla derivatives like exchange-traded equity futures
  • These futures are liquid, inexpensive to transact, need not expose the scheme to bank counterparties
  • Because you’re selling and buying equities at the same time, you would not crystallise a loss
  • Your LDI manager, or another who uses derivatives for you, is best placed to help

The second idea is similar, but uses your liability hedging portfolio rather than equities. In practice, you would:

  • Sell some physical holdings in gilts or index-linked gilts
  • Receive proceeds in cash which you can use to meet your requirements
  • Simultaneously, ask your LDI manager to recreate or synthesise interest rate or real yield exposure
  • Likely using vanilla derivatives like total return swaps
  • This idea is like increasing the loan-to-value ratio on a home mortgage
  • It would work best for schemes whose liability hedging programmes
  • Don’t already rely heavily on borrowing

I’ve shared two ideas with you. Both could be used effectively by most schemes, but they’re not no-brainers. There are some practical issues and risks trustees and their advisors would want to consider first. The biggest of these is to ensure you still have enough collateral to support margin requirements on the new derivatives.

In summary, cash and liquidity can be really helpful to schemes, particularly in a crisis. There are ways to raise cash from investments to improve flexibility without crystallising losses. Some schemes, particularly those with LDI arrangements that use derivatives, could implement either idea quickly. For others, it may be more difficult to make arrangements at short notice. But both ideas are worth considering, perhaps to ensure your scheme is prepared for the next crisis.