LONDON, September 22, 2023 – Increased pension scheme funding levels over the past year have enabled half (54%) of UK pensions schemes to bring forward their endgames. The survey of 84 pension schemes, conducted by WTW as part of its recent pensions de-risking webinar, found that four-in-10 schemes (41%) had not changed their endgame timings and only 5% had delayed their plans, in the past year.
Shelly Beard, managing director in WTW’s Pensions Transactions Team, said: “Scheme funding has improved dramatically in the past year and that has led to a surge in schemes either approaching the de-risking market now, reducing their timescales to buyout or an alternative endgame.
“However, there are still barriers that must be overcome for schemes to achieve their objectives. One is market capacity issues, such as the human resource capacity within the nine insurers currently operating in the de-risking market. This can lead to insurers prioritising deals of a certain size and shape. But there are also actions pension schemes can take – such as improving the quality of their membership data and maintaining flexibility around timing – that can improve the chances of getting good insurer engagement.”
“Improved funding has led to a surge in schemes either approaching the de-risking market now, reducing their timescales to buyout or an alternative endgame.”
Shelly Beard | Managing Director, WTW
WTW’s polling found that the biggest barriers that schemes have identified to achieving their objectives are getting the scheme ‘buyout ready’ (39%) and disposing of illiquid assets (27%). These were ahead of limited capacity in the bulk annuity market (15%); clarity on the use of scheme surplus (12%); and uncertain government regulations (6%).
Schemes that hold illiquid assets, such as commercial property, private equity, private credit and infrastructure, can find that shorter time horizons to buyout do not allow for the efficient disposal of illiquid assets.
With that in mind, for those schemes that are managing illiquid assets as part of their endgame journey, nearly three-quarters of schemes (70%) polled by WTW said they are currently investigating the sale of their illiquid assets on the secondary market. The remaining schemes are investigating support from the insurance market, either by looking to agree a deferred premium structure (24%) or by transferring the assets to an insurer (6%).
Ben Leach, Head of Private Market Solutions in WTW’s Investments business, said: “Many pension schemes have been successfully investing in illiquid assets for decades to improve the risk-adjusted returns of their investment portfolios. However, by their very nature, illiquid assets can be more difficult to dispose of at short notice and this can cause difficulties for schemes that have seen their timescales to buyout reduce significantly over the past year.
“There are several divestment options that schemes can explore, and we are seeing the insurance market become more flexible towards schemes with illiquid assets as it becomes a more frequent occurrence. Selling assets on the secondary market, or selling them back to sponsors, are increasingly common occurrences too. Insurers are also allowing schemes to defer part of the premium payment to allow the illiquids to run off or acquiring the assets themselves as part of a buyout agreement.
“Each pensions transaction has a different set of circumstances so it’s important for scheme advisers to have a deep understanding of both the pension scheme itself and to maximize the value of what can be very attractive assets that pension funds hold.”
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