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Russell stress tester finds funds headed for cash flow crisis
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| Tony Miller
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A new liquidity stress tester from Russell Investments is aimed at helping super funds assess long-term liquidity, and suggests many may be headed for a cash flow crisis when the baby boomer generation retires.
Russell’s Total Fund Evaluator was developed as a response to requests from Russell’s clients in the wake of the global financial crisis to assess their long-term liquidity in the event of another crisis, according to Tony Miller, senior consultant for Russell Investments.
The number of members from whom a fund receives guaranteed contributions is by far the most significant factor in a fund’s long-term liquidity prospects. As such, retaining members in the pension phase is one of the keys to long-term fund stability, with around 20 per cent of account balances in a maturing fund relating to the pension phase, according to Russell.
One of the most serious events an industry fund can encounter is if it ceases to be the default fund for a major employer or group.
An ageing population will have an effect to some degree on all funds, with many projected to be cash flow negative within around 20 years. Those funds may want to consider merging with other funds, Miller said.
“[Those results] shouldn’t have been too much of a surprise because quite a lot of our defined benefit funds are cash flow negative already, [but] no-one thought industry funds would have been cash flow negative just yet,” Miller said.
A typical fund would ultimately go cash flow negative, with a significant proportion of eventual retirement benefits generated by investment earnings and assets in the post retirement stage, he said.
Many of the tools currently available are too simplistic to have adequately identified the extent to which funds are in danger of rising illiquidity and negative cash flow, according to Russell.
The stress tester can also be used to model the impacts of changes in other factors such as inflation, mortality rates, contributions, retention rates, mergers or an increase in the super guarantee.
A phased increase in the guarantee, if introduced, would help increase fund liquidity but will be too slow to have much effect on those funds that are likely to be cash flow negative in the next 20 years, he said.
AUTHOR
Mike Taylor
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