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somewhat. Following the record years of 2018 and 2019, where transactions worth in excess of £40bn were booked, growth slowed to £30bn in 2020 and £28bn last year, according to Bar- nett Waddingham. Mathur believes that 2022 could be the year where a num- ber of larger retirement funds pursue buyout transactions, chiefly because UK schemes are much further along their journey and bond market volatility offers a chance to lock in favourable rates. “Volatility could also mean that there may be more opportune times in the market where pricing becomes more attractive. We saw that in 2020,” he says. “Again, the key is, are you ready to transact, have you done your homework?” Dinesh Visavadia, director at Independent Trustee Services, agrees. “Credit spreads have widened. That gives a real good opportunity for many schemes and pushes them towards the buyout or buy-in region.


“They are now within touching distance of that,” he adds. “That is an unusual situation to have within the corporate setting.”


Shortfall But the flipside of volatility is a dent in investment returns and stark swings in asset valuations for schemes that may be fur- ther away from a buyout scenario and are not fully hedged. The onus is now on the trustee to form a plan to manage those lia- bilities, says Alan Pickering, president of BESTrustees. “There is tremendous pressure on sponsors with a legacy DB scheme to try and take advantage of either risk transfer or the various forms of consolidation that are coming onto the market.” For those schemes, bond market volatility can be stressful, says Kevin Wesbroom, a professional trustee at Capital Cranfield. “One month we are talking about £57m in liabilities and the next month it is £67m. That is pretty scary. “Last month interest rates changed by 30-basis points in just one day,” he adds. “Those are the sort of things that lead you to believe that if you want to get anywhere near a buyout, you want to fully hedge your interest rate and inflation exposures. “Realistically, for schemes that are not fully hedged, buyout has moved a bit further away, unless you have a benign sponsor who is prepared to put more money in. I do not see many spon- sors doing that in the current environment,” Wesbroom says. Another way to cover the shortfall might be by increasing the investment return targets in the liability-driven investing (LDI) portfolio, Pickering says. “Schemes that are a little further away from a buyout may be reviewing their asset allocation and looking at the leverage within that LDI portfolio to decide whether there are other near cash assets that might provide a little extra return and could get them even closer to their desti- nation more quickly.”


24 July–August 2022 portfolio institutional roundtable: Endgame investing


Pickering believes that there are now opportunities to move from the cash element within the LDI portfolio to credit or near cash with varying degrees of longevity. “Obviously, you have to avoid an expensive round trip. You would not want cer- tain asset classes that you could not get in and out of within a few months because of costs. But these are opportunities to bring forward the time when you can affect a risk transfer,” Pickering adds. In Pickering’s experience, schemes looking to position their portfolio for a buyout would not necessarily have to mirror the portfolio of the insurer. “It is rare for schemes these days to transfer in specie. You might want to mirror what the insurer will be doing, but there is no guarantee that the insurer will take your assets in specie,” he says, adding that liquidity and avoiding high entry and exit costs should be the key priority. “The aim is to get the sweet spot between the premium from going slightly away from cash without increasing the round trip,” Pickering says. For Visavadia, a key problem with planning a buyout is the opaqueness of pricing. “My biggest concern is that I can under- stand what markets are doing and where my investments are going but I just do not understand the pricing mechanisms insurance companies have. It is a dark world and there is no


My biggest concern is that I can understand what markets are doing and where my investments are going but I just do not understand the pricing mechanisms insurance companies have. It is a dark world and there is no


transparency around it. Dinesh Visavadia, Independent Trustee Services


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