How can I use the liquidity of my pension fund to improve returns?
Effective liquidity management reduces risks and inefficiencies
Liquidity management is becoming increasingly important for pension funds. The best way to improve liquidity management is to set up a treasury function within the matching portfolio.
By Rik Klerkx, CIO at Cardano Netherlands
Optimal treasury function consists of three parts
There are three elements to optimising the treasury function. First and foremost, you need insight into cash flows based on a forecast of certain and uncertain cash flows, which the treasure can use to anticipate surpluses or deficits and prevent unnecessarily high and expensive liquidity buffers.
The second component of the treasury function consists of investing surplus liquidity with a short horizon, guaranteeing its availability in the very short term. Not only will this translate into 20-40bps return, but it will also improve the fund’s risk profile. Finally, the treasure function should have one more instruments at its disposal to attract liquidity in the event of a short-term deficit, such as including cash in the strategic investment mix, replacing investments with derivatives and temporarily substituting investments for cash. Which of these is best will differ from one pension fund to another, but they may have a major impact on the costs and revenues of the treasury as a whole.
Setting up the treasury requires policy-based foundations, and as liquidity management is becoming increasingly important, this will impact strategic asset allocation. As such, it’s advisable to set a liquidity buffer to prevent sudden liquidity deficits or surplus and to create more opportunities to attract liquidity. It may even be desirable to specify explicitly how much each asset class is to contribute to liquidity management.