Over the past year, increased pension scheme funding levels have allowed 54 per cent of UK pension schemes to bring forward their endgames, according to WTW.
The survey of 84 pension schemes, conducted by WTW as part of its recent pensions de-risking webinar, found that four-in-10 schemes or 41 per cent had not changed their endgame timings and only 5 per cent had delayed their plans, in the past year.
WTW pensions transactions team managing director Shelly Beard says: “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.”
Preparing the scheme for a buyout at 39 per cent and managing the disposition of illiquid assets at 27 per cent, both of which rank higher than worries about limited capacity in the bulk annuity market at 15 per cent, the clarity surrounding the utilisation of the scheme surplus at 12 per cent, and regulatory uncertainties at 6 per cent, are the primary challenges that schemes identify in achieving their objectives.
Schemes holding illiquid assets, including commercial property, private equity, private credit, and infrastructure, may encounter challenges as shorter buyout timeframes do not permit efficient disposal of these assets.
For those schemes managing illiquid assets as part of their endgame journey, around 75 per cent of the schemes surveyed by WTW say they are actively looking into the sale of their illiquid assets on the secondary market. The remaining plans are investigating obtaining support from the insurance sector, either by attempting to reach an agreement on a deferred premium structure, 24 per cent or by transferring the assets to an insurer, 6 per cent.
WTW investments business head of private market solutions Ben Leach says: “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 buyouts 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 acquire 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 maximise the value of what can be very attractive assets that pension funds hold.”
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