How to advise trustees on in-specie asset transfers
Purchasing a bulk annuity is a major step for most trustees: with various factors and subsequent decisions that need to be considered along the road to successful policy implementation.
One such aspect which will be discussed on most transactions – be it a ‘traditional’ or ‘medically underwritten’ pricing approach – is whether or not to undertake an in-specie asset transfer. That is to pay at least some of the premium by way of transferring existing assets held by the pension scheme, rather than liquidating those assets and paying the insurer cash.
Each year there are approximately 175 bulk annuity transactions with UK pension schemes. The majority of these deals are facilitated by the premium being settled fully in cash. However, in the right circumstance there can be clear advantages to choosing an alternative route. Ultimately, the decision will be driven by various factors and will require a number of stakeholders’ involvement.
In this article we explore some of the key questions for advisers when trustees are considering the merits of an in-specie asset transfer.
Why would trustees undertake an in-specie asset transfer?
There are two core reasons why trustees may look to pursue a transfer of existing assets. The first is that there may be a financial benefit in doing so. If the insurer is only going to use any cash payment from the trustees to re-enter the market and purchase similar assets, then market dealing costs may be avoided for both parties via an in-specie asset transfer.
The second is ‘out of the market risk’ which materialises if assets are sold but the sale proceeds are not settled for a few days, whereas the bulk annuity price remains linked to market movements.
In-specie asset transfers are not a free lunch as they do bring with them greater complexity Alex VeysBy transferring assets directly between the trustees and insurer it means that at no point are the trustees or insurer holding cash which is unlikely to move in the same manner as the bulk annuity premium. This may only be a matter of a few days, but the risk of a market shock and subsequent diversion of asset and liability values is avoided. This point is of particular relevance when you consider the recent turmoil seen in the world markets.
What type of assets will most insurers consider?
