Defined benefit (DB) trustees in the UK favour sponsor loans and secondary market sales as they look to manage illiquid assets as part of bulk purchase annuity (BPA) transactions.
In the current environment, in which DB schemes have experienced significant improvements in their funding levels, many scheme trustees have found themselves in a position to accelerate their de-risking plans, bringing the issue of managing any illiquid assets to the forefront of their plans.
While trustees are considering a range of strategies to manage their illiquid holdings, research from Standard Life found that sponsor loans – which involve loaning money against illiquid assets to fund the insurance premium upfront – are proving to be the most popular option for managing illiquid assets, considered by 64% of trustees.
This option is particularly popular because, according to Standard Life, it reduces or eliminates the need for a deferred-premium solution, avoids the complexity of introducing new service providers, and can potentially be set up quicker than other options.
The firm’s research also showed that a sponsor loan can be more cost-effective relative to other options, enabling continued run-off of illiquid asset holdings without the need to crystallise haircuts upon sale or in-specie transfer.
The second most popular option among trustees is secondary market sales, considered by 55% of trustees. This option provides trustees with a greater certainty over their ability to pay the premium while also eliminating the interest costs associated with other options, according to Standard Life.
The insurer added that this trend indicates growing opportunities within the secondary market, particularly for infrastructure, private credit, and property assets.
Other options considered by trustees include deferred premiums (45%) and alternative options such as bank loans (27%) or passing assets in-specie to insurers (18%).
Kunal Sood, managing director of DB solutions at Standard Life, said that 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.
He said: “Over the last 18 months, we have seen the industry’s collective experience in dealing with illiquid assets evolve significantly.”
Sood said 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.
He continued: “We are increasingly seeing schemes arriving to market with solutions for their illiquid holdings already in progress. Trustees who begin these conversations early, working 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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Pamela is IPE's UK correspondent.
Before joining IPE in May 2023, she spent five years writing about the insurance industry.
During her career so far she won awards for Most Promising Newcomer in 2020 and Best Investigative Article in 2022 from the British Insurance Brokers Association, and was also highly commended at the WTW Media Awards for Insurance Features Journalist of The Year.View full Profile
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