Partner Insight: Investing in your risk settlement investment advice

When planning a risk settlement project, there are typically a few key areas to consider: data, benefits, contracting with the insurer, and paying the premium. While the priority order for focus is usually on the data and benefits in the early stages of preparation, the importance of planning your investment approach as early as possible cannot be overestimated.  Despite this, it can often be the area given least attention by some trustee boards.

In years gone by when schemes typically invested in simpler assets which were easier to transition, this may have been a reasonable approach.  However, as the accessibility of complex investments increased, this naturally led to pension schemes adopting a more sophisticated approach to match their assets, while also incorporating more illiquid assets alongside leveraged funds to increase return and close any funding gaps.

Fast forward to today, many schemes now find themselves with a complex portfolio which includes illiquid assets, which cannot be sold quickly or easily. For those schemes whose funding levels have accelerated in the last two years and are now looking to pursue a risk settlement transaction, this poses a problem. If not carefully managed, this problem can lead to lost value through forced selling of the assets to fund the transaction. So how can we best plan for transaction?

Seek specialist investment advice early

Having an experienced risk settlement investment specialist guide you through this critical phase on your scheme's journey will help you avoid common pitfalls, ensure effective negotiations and guide you to a smooth transaction.

Aon have a dedicated risk settlement investment team who, in the last 12 months have negotiated sales of over £2 billion of illiquid assets for our clients to support them in achieving a successful transaction outcome. We've used specialist brokers to sell in the market and get the best pricing, as well as developing innovative, bespoke solutions working directly with insurers' investment teams and asset managers. This was all made possible as a result of investment advisers being engaged in the process early, providing ample time to achieve the optimal solution and retaining maximum asset value.

There is no one-size-fits-all approach and not all illiquid assets are made equal. For one scheme we saved over £100 million by matching the right solutions with the right assets to get the best value from their illiquid portfolio.

Working with the insurer

Negotiating with insurers to match to your assets is a key part of any risk settlement transaction.  In doing so, there has always been more latitude for larger schemes, but increasingly in recent years, it has been possible to negotiate preferable terms for smaller schemes too, achieving a better match to the scheme's assets during the period before transaction (known as a price lock period). Having a closer match for your assets to an insurer's pricing basis means less cost and a significant reduction in market risk - usually dwarfing the actual costs of transitioning the assets. The most attractive price quoted can easily become the worst if the price lock moves differently to your asset portfolio.

Even in cases where the insurer requests early exclusivity, this doesn't have to mean a less tailored approach to a transaction. In the last year we have completed successful buy-ins for schemes with assets ranging from £2.5 million up to nearly £2 billion in single transactions. For the smallest, the choice of insurer for an exclusive process provided a solution that allowed us to transfer pooled fund assets in specie, mitigating market risk and allowing the trustee to focus their time on data and benefits. This evidences how key investment considerations are, even when selecting an insurer for an exclusive process.

Optimise your journey to settlement

In the last 18 months we've seen the return of partial buy-in transactions, where schemes can optimise their assets to insure tranches of their membership (mitigating investment and longevity risks), while making sure residual assets remain resilient to market shocks and continue to support the ongoing liabilities in a risk controlled way. Taking a measured approach to investment planning is key when considering making effective use of partial buy-ins as a long term risk management tool. This might involve forecasting potential reduction in value of assets from forced selling as well as cashflows from illiquid assets to have greater certainty over the viability of the partial buy-in.

Practice makes perfect….

No matter what size your scheme is, putting investment at the top of your agenda and preparing your assets ahead of time reduces your governance burden and reduces risk. This works to give you greater certainty in price and transaction timing. Your specialist investment adviser will work closely with all the parties involved to ensure they are fully aligned, avoiding the pitfalls that crop up through unfamiliarity or a lack of experience.

Further reading