can harvest the illiquidity premium. If you have five years, that is not always going to work. You are going to need to be in very liquid assets which will be acceptable to a buyout firm, which usually means gilts. That is going to require a lot of contri- bution from the sponsor.


Giles Payne


The [CDI] ramp-up period is quite long because a lot of the time you won’t immediately find the right illiquid assets, even if you have a big balance sheet. You will have to do proxies and synthetic CDI assets until you find the right asset, the right infrastructure debt, the right commercial real estate debt. Exley: If you have a 10-year horizon to buyout you don’t want to arrive with a lot of these types of assets in your portfolio; you want a portfolio of investment grade credit and gilts. The idea that it’s going to be straightforward to transfer illiquid assets to an insurer at an easily agreed fair value needs some further thought. Assets that deliver returns over 10 years are attractive for a strategy that’s aiming for buyout in 10 years’ time, but that doesn’t give you 10 years to choose these assets because you really want to be out of them after 10 years. So you have got to get into them fairly quickly. Again, there are two approaches to CDI. There is a long-term strategy, where you are going for


self-sufficiency and so can gradually buy long-dated assets and hold them to maturity. Then there are schemes aiming to buyout that are buying assets to deliver returns over 10 years. Ghosh: There are £2trn of liabilities but the liabilities that are getting bought out each year are merely a drop in the ocean, so presumably for the majority we are talking about the longer-term horizon. For that majority, the advisory community should be well placed to construct portfolios that will help clients to meet their liabilities through these cash-flow generating solutions. It should be doable – rather than paying hefty insurance premiums to insurers. There is also scope to take advantage of the invest- ment opportunities the insurers can’t actually do themselves. Exley: It is feasible for large schemes to do that, but there are a lot of mid-sized schemes where it would make sense for them to transfer that to an insurance company because of economies of scale of the insurer. For the multi-billion pound schemes, it will probably be a self-sufficiency solution. Mijakowska: It depends on their preference. Obviously, we are led by what the client’s objectives are, so this is what we agree at the outset. If a client is going for self-sufficiency then your point is valid, because a pension scheme is not constrained by the same regulatory framework as an insurer and should be able to deliver a better, cheaper solution through self-sufficiency. Some people are going for buyout and if that is the case we also have to design a strategy, which will ultimately give them that.


PI: Are you testing your strategies against different scenarios to account for the impact that transfers can have? Exley: When you start allocating cash-flows, these 10-year assets are generating your pensions in payments, if your deferreds want transfer values you can take that money out of gilts and some of your more liquid higher yielding credit assets. So transfer values aren’t a problem for CDI, they are actually encouraging schemes to adopt CDI strategies as a holding pattern in their flight path while the transfer value story plays out.


March 2019 portfolio institutional roundtable: CDI 11


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