Illiquid assets a key focus for DB pension trustees targeting bulk purchase annuities

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• 40% of trustees say recent changes in the market environment have prompted them to reduce scheme allocation to illiquid assets as a priority
• 26% say improvements in funding levels have led them to start engaging with an insurer earlier than expected about how best to manage their illiquid assets

Improvements in funding levels have accelerated the need for many Defined Benefit (DB) pension trustees to consider the illiquid assets in their schemes, according to research from Standard Life, part of Phoenix Group. The focus on illiquid assets comes as many schemes have experienced significant improvements in funding levels prompting them to review their end-game strategies sooner than expected.

Illiquid assets have historically been viewed as a barrier to de-risking activity as they are more difficult for insurers to accept. Standard Life’s research found that 40% of trustees say the recent changes in the market environment have prompted them to reduce their scheme’s allocation to illiquid assets as a priority. A further 40% confirm it has made them realise the importance of consistently reviewing the liquidity and marketability of their scheme's assets, while a further quarter (26%) say this has prompted them to start engaging with an insurer earlier than expected about the best ways to manage their illiquid assets.  

Various options are being considered by trustees when it comes to managing any illiquid assets held by the scheme. Two thirds (62%) are considering passing the assets to insurers in-specie, while a third (36%) are considering using a secondary market sale. A third (34%) are considering deferring part of the BPA premium, giving them time for the illiquid assets to redeem, or more time to sell the assets, at which point the premium can be fully paid up. Out of all the DB pension trustees surveyed, 100% are considering the options available to them as part of their journey to buy-out plan to manage any illiquid assets.

Kunal Sood, Managing Director of Defined Benefit Solutions and Reinsurance, at Standard Life, comments: “Against the current backdrop of improved funding levels, we are seeing an increasing number of schemes with a significant portion of illiquid assets looking to engage in de-risking activity. Illiquid assets have the potential to offer diversification benefits to schemes and often come with predictable cash flows but they are more challenging for insurers to accept given the regulatory framework around the assets that can be used to back BPA deals.

Kunal Sood continued: “Insurers are looking to support schemes in managing their illiquid assets in new and innovative ways to ensure schemes are able to make the most of the assets, while enabling trustees to harness the opportunities the current market has to offer. There are various options on the table to be explored. Whilst many illiquid assets aren’t desirable for insurers, there are buyers who are seeking these types of assets. A secondary market sale could be a good option for some schemes, whereby an auction process is run by a broker with the aim to sell the assets to a potential buyer. This helps solve the issue quickly, and Standard Life is happy to support schemes in facilitating these transactions.

“What is important to note is that each scheme will have different needs, which underlines the importance of tailored, bespoke approaches to achieving the best outcomes when it comes to managing any illiquid holdings.”

ENDS

Notes to editors:
*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.

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