Key Takeaways
- • The London Borough of Bromley Pension Fund is considering a 10% allocation to illiquid assets—approximately £60 million drawn from its fixed income portfolio—to enhance returns and inflation protection ahead of negative cash flow projections.
- • The £629 million scheme's actuary has calculated it will turn cash flow-negative around 2020/21, prompting the investment subcommittee to debate alternative asset strategies to meet longer-term liabilities.
- • The proposed illiquid allocation represents half of Bromley's current fixed income allocation (16.6% of total assets), reflecting a broader trend among defined benefit schemes with open membership to diversify into alternatives.
- • Current asset allocation stands at 72.4% global equities, 16.6% fixed interest, and 11% diversified growth funds as of June 2014, following a three-phase investment strategy revision initiated in February 2012.
- • Martin Reeves, principal accountant at Bromley, framed the fixed income reallocation as a strategic effort to generate returns approximating liability growth rates while protecting capital.
Summary
The London Borough of Bromley Pension Fund is evaluating a 10% allocation to illiquid assets as part of a broader portfolio rebalancing strategy necessitated by deteriorating cash flow dynamics. The £629 million scheme's investment subcommittee is currently debating whether to redeploy approximately £60 million—representing half of its fixed income allocation—into alternative assets to strengthen long-term liability management and generate enhanced returns with inflation linkage.
The strategic pivot reflects actuarial analysis indicating the scheme will shift into negative cash flow territory around 2020/21, creating urgency around asset reallocation decisions. According to Martin Reeves, principal accountant at Bromley, the fixed income redeployment strategy is designed to "earn something that is roughly the equivalent of the amount by which our liabilities will grow over time," signaling an effort to maintain purchasing power while reducing reliance on traditional fixed income holdings.
This initiative aligns with an industry-wide pattern among defined benefit schemes that remain open to membership. Such schemes increasingly view illiquid investments as a mechanism to boost returns and diversify away from constrained fixed income allocations in a low-yield environment. Bromley's current asset positioning—72.4% global equities, 16.6% fixed interest, and 11% diversified growth funds as of June 2014—reflects decisions made during a three-phase strategy revision launched in February 2012 following underperformance in 2011-12. The subsequent rebalancing favored global equity mandates without regional constraints and, by November 2013, allocated 20% of assets to global fixed income pooled funds.
The contemplated 10% illiquids allocation represents a calculated response to liability-driven investment challenges, positioning Bromley ahead of its projected cash flow inflection point while seeking enhanced yield and inflation protection within a constrained fixed income marketplace.
The strategic pivot reflects actuarial analysis indicating the scheme will shift into negative cash flow territory around 2020/21, creating urgency around asset reallocation decisions. According to Martin Reeves, principal accountant at Bromley, the fixed income redeployment strategy is designed to "earn something that is roughly the equivalent of the amount by which our liabilities will grow over time," signaling an effort to maintain purchasing power while reducing reliance on traditional fixed income holdings.
This initiative aligns with an industry-wide pattern among defined benefit schemes that remain open to membership. Such schemes increasingly view illiquid investments as a mechanism to boost returns and diversify away from constrained fixed income allocations in a low-yield environment. Bromley's current asset positioning—72.4% global equities, 16.6% fixed interest, and 11% diversified growth funds as of June 2014—reflects decisions made during a three-phase strategy revision launched in February 2012 following underperformance in 2011-12. The subsequent rebalancing favored global equity mandates without regional constraints and, by November 2013, allocated 20% of assets to global fixed income pooled funds.
The contemplated 10% illiquids allocation represents a calculated response to liability-driven investment challenges, positioning Bromley ahead of its projected cash flow inflection point while seeking enhanced yield and inflation protection within a constrained fixed income marketplace.
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