Benefit outgo > Cashflow into scheme

[a.begdai]

The investments chapter state the following,

"if the liabilities involve a high level of benefit outgo relative to cashflow into the scheme, it may be appropriate for the scheme to hold higher-yielding investment".

Higher-yielding assets will inevitably generate higher returns but these will be highly risky. So, if the scheme is already running into liquidity/solvency issues, then why it would be appropriate for it to hold highly risky assets? Is it because that holding highly risky assets will give some probability of turning around the fortunes (as the last resort available and nothing to lose)?

Should the scheme not focus on a balance between both high and low yield assets to at least able to secure a part of payouts and look for alternative strategies; such as additional funding to bridge the gap gradually?

 

[mugono]

The investments chapter state the following,

"if the liabilities involve a high level of benefit outgo relative to cashflow into the scheme, it may be appropriate for the scheme to hold higher-yielding investment".

Higher-yielding assets will inevitably generate higher returns but these will be highly risky. So, if the scheme is already running into liquidity/solvency issues, then why it would be appropriate for it to hold highly risky assets? Is it because that holding highly risky assets will give some probability of turning around the fortunes (as the last resort available and nothing to lose)?

Should the scheme not focus on a balance between both high and low yield assets to at least able to secure a part of payouts and look for alternative strategies; such as additional funding to bridge the gap gradually?

This is a good question. I think the key word in the quoted text is 'may'. You are right to be cautious: as you imply, a view would need to be taken on the high-yielding investment on a risk-adjusted basis.

The reality given in the question is that the cash inflows are insufficient to meet the benefit outgo and the 'issue' is what to do about it. In practice, you would need to consider all possible options: and investing higher-yielding investment could be one option. Other things to think about / consider might be the ability to increase employer and or employee contributions, optimising the investment strategy (e.g. of immediate & deferred members) etc.

 

[a.begdai]

This is a good question. I think the key word in the quoted text is 'may'. You are right to be cautious: as you imply, a view would need to be taken on the high-yielding investment on a risk-adjusted basis.

The reality given in the question is that the cash inflows are insufficient to meet the benefit outgo and the 'issue' is what to do about it. In practice, you would need to consider all possible options: and investing higher-yielding investment could be one option. Other things to think about / consider might be the ability to increase employer and or employee contributions, optimising the investment strategy (e.g. of immediate & deferred members) etc.

Thank you for your response. It is indeed critical to keep an open mind while reading most of these open ended subjects. Obviously, the book has its limitations on the amount of content it can capture and rest depends upon the wide imagination of the readers.