Recent changes in the market environment have prompted two fifths (40 per cent) of defined benefit (DB) trustees to reduce scheme allocation to illiquid assets as a priority, research from Standard Life has revealed.

The group noted that recent improvements in funding levels have accelerated the need for many DB pension trustees to consider the illiquid assets in their schemes, as illiquid assets have historically been viewed as a barrier to de-risking activity.

In particular, the survey revealed that recent market changes made a further 40 per cent of DB trustees realise the importance of consistently reviewing the liquidity and marketability of their scheme's assets.

In addition to this, just over a quarter (26 per cent) said that this has prompted them to start engaging with an insurer earlier than expected about the best ways to manage their illiquid assets.

Various options are being considered by trustees when it comes to managing any illiquid assets, according to the survey, with just under two thirds (62 per cent) considering passing the assets to insurers in-specie, while 36 per cent are considering using a secondary market sale.

Just over a third (34 per cent) are also considering deferring part of the bulk purchase annuity (BPA) premium, giving them time for the illiquid assets to redeem, or more time to sell the assets, at which point the premium can be fully paid up.

Out of all the DB pension trustees surveyed, 100 per cent are considering the options available to them as part of their journey to buyout plan to manage any illiquid assets.

Commenting on the findings, Standard Life managing director of defined benefit (DB) solutions and reinsurance, Kunal Sood, stated: “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."

Despite this, Sood acknowledged that 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," he continued. "While 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.”

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