Breaking the barrier
The realisation of residual illiquid assets is becoming an increasingly prevalent problem to solve in risk transfer transactions.
The liquidity crisis of 2022 arguably fuelled the current strength of many schemes’ funding, with more schemes looking to buy in earlier than perhaps originally anticipated. At the same time, being typically less sensitive to short term yield changes, illiquid asset classes became a relatively larger proportion of schemes’ overall asset allocation. Could this cause a block in the road?
To undertake buy-in transactions, schemes need a portfolio of assets that are both highly liquid and low risk. Even schemes with a modest proportion of illiquid assets can find themselves faced with an “illiquidity barrier”, delaying transactions across the market. So what options might be available to schemes that are relying on illiquid assets to fund risk transfer transactions?
We are seeing innovative solutions to the problem…
Deferred premiums, where the insurer agrees that an amount of the insurance premium is payable at a later date, can be a relatively streamlined approach and one that is being seen more and more in the current market. It can buy trustees more time to realise the illiquid assets to their full value. Saying that, it is not without its own added costs, particularly given higher interest rates.
An inter-company loan might eliminate the need for a deferred premium and help provide a bridge to trustees to progress the risk transfer transaction whilst the illiquid assets are realised. This route has the potential to be fast and flexible, possibly also helping to manage the hazard of trapped surplus. Nevertheless, the necessary rules will need to be addressed together with negotiations with the company entity.
A secondary sale of illiquids can be done before a buy-in or afterwards, eg in conjunction with the above options. In either case, such a sale needs to be planned carefully. There are many elements (valuation dates, timing, legacy documentation and tax, to name a few) that need early engagement and significant preparation.
Of course, these are not the only options, and every case will require its own bespoke approach. As ever, preparation is everything and early engagement with insurers can help put trustees in pole position to progress the transaction.
For further information on any of the above please see our latest FIG briefing and/or speak to your usual Sackers contact.
+44 (0)20 7329 6699
enquiries@sackers.com
20 Gresham Street, London, EC2V 7JE - 
