Given that the trend for UK pension funds over the past few years has been to increase alternative allocations and take advantage of the so-called illiquidity premium, switching to a redemption sooner than expected could cause headaches. to certain directors and their advisers.
“While insurers often hold illiquid assets in their portfolios, these are usually very specific investments that meet the underwriting criteria and are eligible for the corresponding adjustment for the insurer. This means that insurers do not generally dislike taking illiquid assets out of pension plans,” Mercer said. Ward warned.
This means that one of the first considerations for pension funds when planning their path to a takeover is knowing when and how to dispose of illiquid assets – without being forced sellers and having to take haircuts on their positions.
“As more complex plans come to market, we are seeing more of them with illiquid physical assets,” said Dominic Moret, head of pension risk origination and execution-transfer at Legal & General Group PLC. in London. “Those who have embarked on a longer-term journey have already started the treatment process. But due to improvements in the level of funding, we are seeing more and more programs having this issue to address.” This is where the partnership and collaboration between the pension fund, the advisor and the insurer comes in, said Mr. Moret.
Pension fund trustees shouldn’t necessarily let fears about illiquid assets in their portfolios hold them back, sources said. And that’s where being prepared and having a good relationship with an insurer can help.
“If it (the illiquid investment) cannot be transferred to the insurer, and provided it does not represent a huge proportion of the liability, most insurers are open to structuring a contract that allows the proceeds of this (illiquid sale) to be paid after the transaction,” said Ian Aley, London-based head of transactions at Willis Towers Watson PLC. In effect, the premium is deferred for the next two years “so that the regime does not incur a loss for the discount sale of this asset,” Aley said.
Another option is for the advisor or insurer to consider whether another pension fund might consider buying such an asset at fair value.
But in some cases, the illiquid allocation is too large to postpone or eliminate. Mathew Webb, head of UK insurance solutions and strategy at Legal & General Investment Management, also in London, said a number of the $1.8 trillion manager’s clients have taken out illiquid programs “assuming they have eight years to exit” the positions. And these are significant exposures – 20% to 30% in private equity assets, for example.
In this case, deferring the premium is not an option or is too expensive to do. Next, the manager will look at immunizing other assets in the portfolio, locking in other investment risks, then unwinding positions until they can be transferred to an insurance-friendly portfolio.
It is also possible that insurers will, in the future, be able to take on illiquid assets and other assets beyond currently favorable assets, such as corporate bonds and gilts. At present, insurers are somewhat crippled as to the assets they can hold on their books by the Solvency II Directive. Reforms to the guideline are being consulted, and “there is arguably an opportunity to help address this inefficiency” on what types of assets are acceptable, Mercer’s Mr Ward said.