DB pension funds selling off illiquid assets

Commenting on reports that DB pension funds are selling off illiquid assets, Elaine Torry, Partner & Co-Head of Trustee DB Investment, Hymans Robertson, said:

“In light of the improvement in funding positions over the last 12-18 months, trustees and sponsors of UK DB pension funds are unsurprisingly revisiting their schemes’ investment strategy and considering whether the balance of risk and return remains appropriate for achieving their long-term target within the timescales required. For many this has led to, among other things, the decision to sell some or all of their illiquid assets.

“The absence of a deep and active secondary market in some illiquid asset classes, together with forced selling, has unsurprisingly led to some illiquid assets being sold at deep discounts to the reported valuations. For some assets, such as UK offices, it is proving difficult to find buyers even with the discounts on offer. This activity and the conditions experienced could not serve as a more stark reminder to trustees of UK DB pension schemes to consider ways in which investments in illiquid assets can be allowed to run-off naturally and where early exit from an illiquid asset is required, then it should be done so in a planned and phased way to limit the value leakage that is being seen.

“Classifying all current secondary market activity as a rush to ditch assets or forced selling is likely an oversimplification. Many pension schemes are taking this opportunity to sell some of their older holdings and recycle capital into new private equity funds to simplify their strategy or selling to generate liquidity for an insurance risk transfer solution. Similarly, some schemes with a longer time horizon are taking advantage of current discounts to add opportunistically to their private markets exposure or to access funds which previously had long capital queues. Some of the funds that are currently available at a discount were trading at a premium 12 months ago. And some pension schemes with the ability to maintain some illiquidity in their portfolios are adding to their secondary market exposure with this trend in mind.”