Rising funding levels are making Defined Benefit (DB) pension trustees think about their illiquid assets with 40 per cent saying that reducing their scheme’s allocation to illiquid assets is now a top priority as a result of the recent changes in the market environment, according to Standard Life.
According to the study, a further 26 per cent say this has prompted them to start talking to an insurer earlier than expected about the best ways to manage their illiquid assets, and another 40 per cent confirm it has made them realise the value of routinely reviewing the liquidity and marketability of their scheme’s assets.
The trustees are considering a number of approaches for managing any illiquid assets owned by the scheme. A third or 36 per cent is considering using a secondary market sale, while two-thirds or 62 per cent are exploring giving the assets to certain insurers.
A third or 34 per cent are considering delaying some or all of the BPA premium in order to give themselves more time to sell the assets or to redeem the illiquid assets, at which point the premium can be paid in full. One hundred per cent of the DB pension trustees polled said they are reviewing their alternatives to manage any illiquid assets as they move towards a buy-out strategy.
Standard Life managing director of defined benefit solutions and reinsurance Kunal Sood says: “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.
“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.”
