Many of the developed world’s maturing pension plans are now reaching a tipping point as they move toward final runoff. They find themselves in a negative cash flow position in which they are paying out more in benefits than they are receiving in contributions. The need to service cash outflow is an additional burden for investment portfolios already straining to achieve long-term investment goals, a burden that will weigh ever more heavily as plans mature.

CORPORATE DEFINED BENEFIT NET CASH FLOW POSITION AS % OF ASSETS

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Source: HOLT® (based on accounting disclosures for S&P 500, FTSE 350 and MSCI Europe), J.P. Morgan Asset Management; data as of June 30, 2017.

We examine how negative cash flow impacts funding, risk and return for pension plans and provide insight on how plans are likely to adapt their investment strategies in response, taking into account current capital market conditions and our 2018 Long- Term Capital Market Assumptions.

We expect sustained demand from pension funds for high quality bonds and income-generative assets over the 10- to 15-year horizon of our LTCMAs. This will be associated with a shift away from hedging duration with derivatives and toward matching cash flows with physical assets — in particular, buy and maintain credit and core real assets.

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