Illiquid investments holding back de-risking activity

Two in three de-risking employee benefit consultants (EBC) have had illiquid assets delay de-risking transactions for some of their clients, according to research from Standard Life.

The research, which included views from five major professional trustee firms and 12 EBCs, found that all EBCs surveyed found dealing with illiquid asset holdings in the context of a bulk annuity transaction challenging, along with 3 in 5 professional trustee firms.

Standard Life noted that whilst many schemes have enjoyed significant improvements to their funding levels, bringing forward de-risking plans, 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.

In addition to this, half of EBCs and 2 out of the 5 professional trustee firms said that there are misconceptions around illiquids, with half of EBCs and professional trustee firms stating that their clients believe deferred premiums are the only viable solution.

However, the majority (11 in 12) of EBCs think engaging with an insurer earlier regarding illiquids could help with any challenges if buyout is a scheme’s end goal.

Trustees agreed, with four out of five professional trustee firms stating that engaging with an insurer earlier could help with managing illiquid assets if a scheme is targeting buyout.

However, Standard Life clarified that 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.

Standard Life managing director of DB solutions, Kunal Sood, 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 buyout 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.”

Adding to this, Hymans Robertson partner and risk transfer specialist, Michael Abramson, said: "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 buyout, but generally pension schemes should be able to find better value by dealing with these assets themselves.”

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