DB solutions report: Managing illiquid assets during a bulk purchase annuity transaction

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In the realms of bulk purchase annuities (BPA), managing illiquid assets was the hottest topic of 2023.

Over the past 18 months, many schemes have enjoyed significant improvements to their funding levels, which has often brought forward their de-risking plans.

As a result, many schemes’ assets are not in the shape they expected at this stage of their journey. In particular, illiquid assets represent a much larger proportion of asset strategies than expected for schemes reaching buy-out affordability.

So while many schemes can afford to buy-out on paper, lots of them are holding illiquid assets that are generally unsuitable for funding a buy-in premium.

This presents a challenge to schemes that are considering a buy-in but have insufficient liquid assets to fund the premium.

This is why we have launched our Thinking Forward report, Managing illiquid assets during a bulk purchase annuity transaction.

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What’s inside?

This report explores the following areas:

1. The context – why many schemes have a higher asset allocation to illiquid assets than they expected at this stage of their journey plan.
2. Our research – two-thirds of employee benefit consultants (EBCs) said illiquids had delayed a transaction they advised on; deferred premiums and secondary market sales are the actions DB schemes most commonly consider.
3. Challenging understanding – why there’s generally little overlap between pension scheme illiquid assets and the illiquid assets that insurers want.
4. An insurer perspective – why trustees should engage with insurers early, understand the range of options, and ensure there is a clear plan for illiquid assets before formally requesting quotes.
5. How schemes are taking action – from using illiquid assets as premium payment, arranging a deferred premium with an insurer, selling illiquid assets on the secondary market, loan arrangements, or delaying the time to buy-out.
6. The secondary market – by engaging with secondary market brokers to understand the sale value of their illiquids, schemes may be better placed to assess the true affordability of transacting with an insurer.
7. Looking ahead – insurer capacity, the buy-out bottleneck and regulatory reforms will be key challenges over 2024.

We hope you enjoy our first Thinking Forward report. If you have any questions about it or would like to discuss the themes covered, please get in touch.