Bromley Pension Fund plans to invest up to £60m in illiquid investments in a bid to boost returns enough to keep its level of income above that of its outgoings.
Bromley’s pensions investment committee has resolved to invest up to 10% of its £629m fund in illiquid assets.
Investors are prevented from withdrawing from illiquid assets for a set period of time, and for this are paid an ‘illiquidity premium’, historically returning more than liquid assets.
Bromley plans to move 10% of its funds out of corporate and government bonds and place it instead in illiquid assets. Currently, it holds 70% of the portfolio in global equities, 10% in diversified growth funds, and 20% in bonds.
The minutes of the committee’s latest meeting reveal that, without the boost to its projected returns that it hopes the illiquid allocation will bring, the fund will not achieve high enough returns to cover the gap between the contributions members pay in and the pensions it pays out. This would render it ‘cashflow negative’.
A pension fund’s cashflow is usually measured as the pensions being paid out minus the contributions being paid in. Where outflow exceeds income, pension funds must make up the gap with income from investments.
The committee minutes said: “The fund is currently cash-positive once income from equities being re-invested is taken into account, but, excluding investment returns, became cash-negative in 2012-13 and the actuary expects this position to generally get worse.
“Put simply, it is possible to say that net dealings with members put the fund in a cashflow negative position and investment income might be needed each year from now on to pay benefits due.”
The committee has resolved, on the advice of consultants AllenbridgeEpic, to procure a fund manager to run the illiquid investments.
Earlier this month, the £5.2bn London Pension Fund Authority announced it would finance the building of 200 homes in east London, adding to its illiquid holdings.
At an LGC Investment roundtable in early September, a number of local government pension scheme officers expressed exasperation with the poor performance of equities and bonds, countering this with their concerns over the affordability and ease of investing in illiquid assets as an alternative.