“Significant” improvements in defined benefit (DB) scheme funding levels have seen DB trustees prioritise managing illiquid assets, with 64 per cent considering a sponsor loan, Standard Life’s DB Trustee Insights Index has revealed.  

The index showed that now trustees are in a position to accelerate their de-risking plans,
the issue of managing any illiquid assets has been brought to the forefront of trustee plans.

Given this, it suggested that DB trustees are considering a range of strategies to manage their illiquid holdings as they seek to meet the necessary liquidity requirements needed to secure their endgame strategy.

In particular, the index showed that sponsor loans are a popular option for trustees managing illiquid assets, as they reduce or eliminate the need for a deferred premium solution, avoid the complexity of introducing new service providers, and can potentially be set up quicker than other options.

In addition to this, Standard Life suggested that it can be more cost-effective, which would enable continued run-off of illiquid asset holdings without the need to crystallise haircuts upon sale or in-specie transfer.

Sponsor loans were closely followed by secondary market sales, as 55 per cent of trustees considering buy-in or buyout said they have considered this option, up from 36 per cent last year.

Secondary market sales involve selling some or all the illiquid assets to another investor on the secondaries market.

The firm said by exploring this ahead of approaching insurers for a bulk purchase annuity transaction, trustees benefit from “greater certainty” over their ability to pay the premium while also eliminating the interest costs associated with other options.

Standard Life said this trend indicates growing opportunities in the secondary market, particularly for infrastructure, private credit, and property assets.

In addition to this, 45 per cent of respondents said they are considering deferring part of their buyout premium this year, an increase on the third (34 per cent) of trustees who were considering this solution a year ago.

Deferred premiums remain a popular option for DB trustees, allowing the portion of the premium related to the illiquid assets to be paid at an agreed later date.

This can enable either more time for a secondary market sale or for the illiquid assets to roll off naturally and allow schemes to better manage liquidity in line with the timing of their transaction.

Meanwhile, alternative strategies such as bank loans (27 per cent) and passing assets to insurers in-specie (18 per cent) are also being considered by trustees to manage illiquid assets.

This is a “sharp” decline from 62 per cent of DB trustees considering passing assets to insurers in-specie trustees to manage illiquid assets last year.

Standard Life said that alternative strategies are not as popular as the other options as they may introduce more complexity and potential delays.

The firm noted insurers have differing levels of both appetite and capabilities for taking assets in-specie, with certain asset classes such as infrastructure equity, private equity or hedge fund investments difficult to accommodate for most due to regulatory constraints.

Commenting on this, Standard Life DB solutions managing director, Kunal Sood, said: “Improvements in DB scheme funding levels have accelerated de-risking plans for many schemes, and a key focus for DB trustees is how to manage any illiquid assets they hold to ensure they are in the strongest position possible for the next stage of their de-risking journey.

“Over the past 18 months, we have seen the industry’s collective experience in dealing with illiquid assets evolve significantly.

“Insurers continue to play an important role in helping to manage this, but with a much broader range of liquidity solutions available to help support scheme objectives – including sponsor loans and secondary market sales – DB trustees now have even greater choice.”

Sood stated that the industry is seeing schemes arrive to market with solutions for their illiquid holdings already in progress and that trustees who begin these conversations early, work with their advisers and insurers to fully assess their assets, will be best positioned to smoothly meet their de-risking objectives.

“By considering all available options, trustees can ensure that their decisions balance liquidity management and risk reduction in a cost-effective manner,” he said.

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