Sponsor loans and secondary market sales are most favoured options for Trustees managing illiquid assets as part of BPA transactions

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• Standard Life DB Trustee Insights Index reveals almost two thirds (64%) of DB Trustees are considering a sponsor loan
• Over half (55%) are considering a secondary market sale
• Deferred premiums are the third greatest consideration (45%) for Trustees preparing for transaction

In the current environment, in which Defined Benefit (DB) schemes have experienced significant improvements in their funding levels, many DB scheme Trustees have found themselves in a position to accelerate their de-risking plans, bringing the issue of managing any illiquid assets to the forefront of their plans. Research from Standard Life, part of Phoenix Group, reveals that DB Trustees are considering a range of strategies to manage their illiquid holdings as they seek to meet the necessary liquidity requirements needed to secure their endgame strategy.

The latest DB Trustee Insight Index¹ highlights that sponsor loans are proving to be the most popular option for managing illiquid assets, followed by secondary market sales and deferred premiums, while alternative strategies such as bank loans and passing assets to insurers in-specie are also considered.

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Managing liquidity with sponsor loans

Almost two thirds (64%) of DB trustees considering buy-in or buy-out have considered sponsor loans as a liquidity option, involving loaning money against illiquid assets to fund the insurance premium upfront. This is a popular option for many trustees, given it reduces or eliminates the need for a deferred premium solution, avoids the complexity of introducing new service providers, and can potentially be set up quicker than other options. A sponsor loan can also be more cost effective relative to other options, enabling continued run-off of illiquid asset holdings without the need to crystallise haircuts upon sale or in-specie transfer.   

Unlocking value through secondary market sales

Secondary market sales, which involve selling some or all the illiquid assets to another investor on the secondaries market, are also an increasingly common strategy. More than half (55%) of DB Trustees considering buy-in or buy-out have considered this option, increasing from a third (36%) last year². By exploring a secondary market sale ahead of approaching insurers for a BPA transaction, Trustees benefit from greater certainty over their ability to pay the premium while also eliminating the interest costs associated with other options. This trend indicates growing opportunities within the secondary market, particularly for infrastructure, private credit, and property assets.

Deferred premiums provide flexibility

Deferred premiums remain a popular option for DB Trustees, allowing the portion of the premium related to the illiquid assets to be paid at an agreed later date, enabling either more time for a secondary market sale or for the illiquid assets to roll off naturally. These types of solutions can allow schemes to better manage liquidity in line with the timing of their transaction. Almost half (45%) of DB Trustees are considering deferring part of their buy-out premium this year, an increase on the third (34%) of Trustees who were considering this solution a year ago.

Alternative de-risking strategies 

Some DB Trustees are exploring alternative options to help manage any illiquid assets, such as bank loans or passing assets in-specie to insurers, although these are not as popular since they may introduce more complexity and potential delays. Less than one-third (27%) are considering bank loans for liquidity, and just two-fifths (18%) are looking at in-specie transfers - a sharp decline from nearly two thirds (62%) last year. Insurers have differing levels of both appetite and capabilities for taking assets in-specie, with certain asset classes such as infrastructure equity, private equity or hedge fund investments difficult to accommodate for most due to regulatory constraints.

Kunal Sood, Managing Director of Defined Benefit Solutions at Standard Life, part of Phoenix Group, commented: “Improvements in DB scheme funding levels have accelerated de-risking plans for many schemes, and a key focus for DB Trustees is how to manage any illiquid assets they hold to ensure they are in the strongest position possible for the next stage of their de-risking journey. Over the last 18 months, we have seen the industry’s collective experience in dealing with illiquid assets evolve significantly.

“Insurers continue to play an important role in helping to manage this, but with a much broader range of liquidity solutions available to help support scheme objectives – including sponsor loans and secondary market sales - DB Trustees now have even greater choice. We are increasingly seeing Schemes arriving to market with solutions for their illiquid holdings already in progress. Trustees who begin these conversations early, working with their advisers and insurers to fully assess their assets, will be best positioned to smoothly meet their de-risking objectives. By considering all available options, Trustees can ensure that their decisions balance liquidity management and risk reduction in a cost-effective manner."

ENDS

 
Notes to Editors

^[1] Research conducted by Censuswide on behalf of Standard Life, between 7th October 2024 – 22nd October 2024, amongst 50 DB Pension Scheme Trustees, of Schemes larger than £100m. 

^[2] Research conducted by Censuswide on behalf of Standard Life, between 28th April 2023 – 9th May 2023, amongst 50 DB Pension Scheme Trustees, of Schemes larger than £100m.

For further information, photos, video content or interviews, contact: 

Media contact

Jennifer Smallwood/ Samantha Griffith
Senior PR Manager/PR Manager
Standard Life, part of Phoenix Group
07581 062180 / 07752 465345
Jennifer_Smallwood@standardlife.com / Samantha_Griffith@standardlife.com

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