Managing Illiquid Assets for Defined Benefit Schemes: Trends and Insights

Standard Life's latest findings reveal that many defined benefit (DB) trustee boards are contemplating transferring illiquid assets as part of their preparation for bulk annuity transactions. M&G's recent £60 million transaction with an undisclosed pension scheme involved selling an illiquid asset to the company's With Profits Fund. This approach, along with secondary market sales, is gaining popularity among trustees venturing into the insurance sector.

The direct transfer of illiquid assets from DB schemes to insurance companies remains uncommon. A survey conducted by Standard Life involving over 100 DB scheme trustees highlights that more than half of the respondents are considering in-specie transfers or secondary market sales. These strategies can enhance transaction certainty and timing, as illiquid assets like private equity, private debt, or real estate could otherwise delay deals. According to Standard Life, there is a noticeable increase in demand for flexible and cost-efficient solutions as schemes closely assess their illiquid portfolios.

Managing illiquid investments has emerged as a crucial aspect of DB schemes' endgame planning, particularly after the 2022 gilts crisis improved funding levels and accelerated journey plans for numerous schemes. Companies such as XPS, Isio, and MeltX are now offering services to assist DB schemes in divesting from private market assets. While direct transfers to insurers remain infrequent due to asset restrictions, some bulk annuity arrangements have included such transactions. A notable instance is the Pension Insurance Corporation’s £1.3 billion buy-in with the Coats UK Pension Scheme, which incorporated an in-specie transfer of certain illiquid assets.

Claire Altman, managing director of pension risk transfer and individual retirement at Standard Life, stated, "Managing illiquid assets remains one of the most challenging aspects of preparing for buyout, and trustees across the industry are considering a wide range of approaches to navigate this complexity." She emphasized that the viability of any solution depends on various factors such as insurer appetite and regulatory requirements. While in‑specie transfers and secondary market sales can play a role for some schemes, they are just part of a broader toolkit that trustees are exploring.

Standard Life's research indicates that trustees are exploring multiple options for managing private market assets, including deferred premiums where payment to an insurer is delayed pending an asset sale, and possibilities for sponsoring employers to take on asset ownership. The importance of evaluating asset liquidity, valuation certainty, and transaction timing is crucial, as delays or inadequate advice can significantly impact transaction timelines.

Standard Life emphasized the risks of inadequate preparation, stating, "The absence of preparation and strong counsel can cause hold-ups in transacting, and with market activity expected to remain elevated and insurer capacity fluctuating over time, the cost of delay is becoming more evident. Schemes that prepare early and engage proactively will be best placed to secure insurer interest and maintain momentum as they progress towards buy-in or buyout."