This is considered by a new Thinking Forward report, published today by Standard Life, part of Phoenix Group, which explores the views of 5 major professional trustee firms and 12 EBCs.
The report, ‘Managing illiquid assets during a bulk purchase annuity transaction’, looks at the context, perceived barriers and suite of solutions for managing illiquid assets in the context of pensions de-risking, revealing the following:
• All EBCs said dealing with illiquid asset holdings in the context of a bulk annuity transaction is challenging, along with 3 in 5 professional trustee firms.
• Half of EBCs and 2 out of the 5 professional trustee firms believe there are misconceptions around illiquids.
• 11 in 12 EBCs think engaging with an insurer earlier regarding illiquids could help with any challenges if buyout is a scheme’s end goal.
• 4 out of 5 professional trustee firms also think engaging with an insurer earlier could help with managing illiquid assets if a scheme is targeting buyout.
• Professional trustees and EBCs both see deferred premiums and secondary market sales as the most common options DB schemes are considering to manage their illiquid asset holdings.
The market environment
Over the past 18 months, many schemes have enjoyed significant improvements to their funding levels, primarily driven by higher interest rates. The speed of this improvement in funding positions has brought forward de-risking plans for many schemes. However, this acceleration means many schemes haven’t had sufficient time to get their assets into the shape they expected at this stage in their de-risking journey, leaving them with a higher allocation to illiquid assets than expected.
Illiquid assets may include property, private equity or infrastructure, which cannot be promptly and easily sold for cash. These assets are typically unsuitable for funding a bulk annuity premium, as they are difficult for insurers to accept due to the insurance regulatory regime having stricter asset requirements compared to the requirements for pension schemes.
Illiquid assets – barriers and solutions
Experience and the perception of the challenges illiquid assets present may vary between trustees and EBCs, which may impact decision-making and de-risking strategies.
Half of EBCs and 2 out of the 5 professional trustee firms surveyed believe there are misconceptions when it comes to managing illiquid assets. Half of EBCs and professional trustee firms say their clients believe deferred premiums are the only viable solution to help deal with illiquids. All firms noted that some clients believe holding illiquid assets will prevent them from conducting a buy-in deal.
However, while schemes’ illiquid assets are not usually a natural fit for insurer balance sheets, there are a range of potential solutions to fit most circumstances. Deferred premiums and secondary market sales are identified as the most popular option considered by DB schemes when managing their illiquid assets, but other potential options noted include financing solutions (such as loans) or sales of the assets to the scheme sponsor.
Kunal Sood, Managing Director of Defined Benefit Solutions at Standard Life said: "It is clear that there are a variety of perceived barriers and concerns around managing illiquid assets, but it is encouraging to see increasing awareness of the challenges and an increasing suite of possible solutions that schemes can draw on. Illiquid assets are undoubtedly a challenge, exacerbated by schemes being closer to buy-out than originally anticipated, bringing the issue of the management of illiquid assets to the forefront. Engaging with an insurer earlier can help navigate these challenges, as can a concurrent focus on scheme-side solutions, and it’s promising that so many EBCs and professional trustee firms acknowledge this as important in a scheme’s journey to de-risk.”
Michael Abramson, Hymans Robertson Partner and Risk Transfer Specialist, commented: "This new report highlights the increasing challenges schemes considering buy-in and buy-out are facing when it comes to managing illiquid assets. Sadly there is generally little overlap between the illiquid assets that pension schemes hold and the ones that insurers want. For any assets that fall into this category of not being wanted by pension scheme or insurer, one of these parties is going to have to sell the assets and the solution really boils down to who will do so and over what time period. There are some scenarios where it makes sense for insurers to take these assets as part of a buy-in or buy-out, but generally pension schemes should be able to find better value by dealing with these assets themselves.”
Joe Evans, Senior Vice President at Redington, commented: “For an increasing number of buy-in transactions, finding a solution for the illiquid assets is the critical hurdle in determining whether the deal is feasible or not. The right solution will vary for different schemes and can be nuanced, so it is important for trustees to understand the options available and engage with insurers on this topic early in the process.”
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