Improvements in funding levels have accelerated the need for many defined benefit (DB) pension trustees to consider the illiquid assets in their schemes, Standard Life has found.

The focus on illiquid assets comes as many schemes have experienced significant improvements in funding levels prompting them to review their end-game strategies sooner than expected.

In the past, illiquid assets have been seen as a barrier to de-risking activity as they are more difficult for insurers to accept. Research by Standard Life has found that 40% of trustees say that the recent changes in the market environment has prompted them to reduce their scheme’s allocation to illiquid assets as a priority.

A further 40% confirmed that it has made them realise the importance of consistently reviewing the liquidity and marketability of their scheme’s assets, while a further quarter (26%) said this has prompted them to start engaging with an insurer earlier than expected about the best ways to manage their illiquid assets.

A range of options of being considered by trustees when it comes to managing illiquid assets held in the scheme. Two thirds (62%) of trustees are considering passing the assets to insurers in-specie, with a third (36%) considering using a secondary market sale. A third (34%) are also considering deferring part of the BPA premium, giving them time for the illiquid assets to redeem, or more time to sell, at which point the premium can be fully paid.

Out of all of the DB pension trustees surveyed, 100% are considering the options available to them as part of their journey to buy-out plan to manage any illiquid assets.

Managing director of DB solutions and reinsurance at Standard Life, Kunal Sood, said: “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.

“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.

“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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