UK - Local authority pension funds threatened by falling contribution income can offset the decrease through the better management of dividends and coupons, Mercer has argued.

Speaking in the upcoming September issue of IPE, investment principal Jo Holden said that while actuarial valuations for local government pension schemes (LPGS) might show funds becoming cash-flow negative in less than five years - coming in the wake of public sector redundancies and highly publicised changes to the system that unions feared would impact contribution income - the figures would only look "scary" if investment income was excluded.

"If you then factor investment income back into those projections - looking at equity dividend income, bond coupons, property - the period stretches right back out again," she said.

Graeme Muir, partner and head of public sector pensions at Barnett Waddingham, added that investments would likely shift towards those assets still providing the kind of returns funds are hoping to get from equities, "maybe higher income and less capital growth".

Muir suggested that while this would likely rule out some countries or regions - such as Japanese equities due to domestic companies' aversion to dividend payments - opportunities remained.

He said the manageable shift in strategy would likely come as funds monitored dividend payments more closely through a payment timetable when calculating their cash flow.

Closer management of dividend inflow is currently under consideration at the UK's largest public sector scheme, the £11.4bn (€13.6bn) Strathclyde Pension Fund, according to its head of pensions Richard McIndoe.

McIndoe said dividend flow was currently not managed "to any technical extent", adding: "We tend to take what natural divided flow comes from our portfolio and, as things stand, re-invest it."

The Scottish scheme, which has seen net income from employers fall from £118m to £43m in a year, is likely to change tack soon.

McIndoe added: "Clearly, as we go forward, we won't be able to invest all of it - we will have to use some of it to pay pensions."

For more on changes to the local government pension schemes and other issues currently affecting the UK industry, see the September issue of IPE magazine.

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