(Bloomberg) -- UK pension funds, assessing their portfolios after a turbulent two months, are looking at selling down some of the private equity and real estate assets they couldn’t unload during the height of the crisis. 

Pensions collectively sold billions of pounds of stocks and bonds to meet margin calls as a spike in UK rates caused derivative losses. While the stress has subsided, those moves have left many plans with a higher-than-desired proportion of illiquid assets such as infrastructure, property, private equity and private debt, according to pension consultants whose clients are considering divestments. 

Several pensions have offered portfolios of illiquid assets for sale to private equity secondaries funds, according to Charlotte Morris, a partner at private markets firm Pantheon. Potential buyers -- including hedge funds and banks -- are also proactively reaching out to pension consultants to gauge their clients’ interest in selling, those consultants say.

“In the last couple of months we are already seeing a number of UK pension funds coming to market with portfolios,” Morris said. “Different pension funds take different perspectives. Some have recognized that liquidity is important to them. Others are not so overallocated, but they still want to do this right now. It varies by pension fund but for us it’s an interesting market opportunity and we are keen buyers.”

It’s still not an easy decision. Some pension plans have so far been put off by the discounted prices they’re being offered in secondaries markets, according to a person involved in such talks. 

A selloff in the gilt market triggered by unfunded tax cuts announced by the government of then-Prime Minister Liz Truss on Sept. 23 was exacerbated by UK pensions’ so-called liability-driven investments. As gilt yields rose, many pensions had to sell bonds, pushing yields up further and prompting more calls for collateral. The spiral was only broken when the central bank stepped in with a bond-buying program.

The spike caused a liquidity squeeze that forced funds to sell-off assets and some to turn to corporate sponsors for emergency loans. Still, many funds ended up with an improved funded position as the rise in rates reduced the accounting value of future liabilities. 

Pensions across Europe and the US had already faced concerns about over-allocation to private assets as public markets dropped this year, typically at a faster pace than declines in less liquid assets. That was exacerbated by sales that locked in drops during the UK market rout.

“For some schemes, illiquid asset exposure will now be a challenge,” said Emma Hudson, a director at consultancy Isio. “They might have intended to have 20% exposure and they might now have 40%+ as their scheme has shrunk in size, and some will decide they need to cut this back.”

The rebalancing has started but won’t finish anytime soon. Such processes can often take several months to complete. Some custodian banks are also offering loans to trustees whose funds are overexposed to improve liquidity without forcing sales at heavy discounts, said consultants and trustees who asked not to be identified because the discussions were private. 

In 2021, defined-benefit pension schemes had about 20% invested in equities, just over 70% in bonds, and the remainder in other investments including private assets, according to an annual report from the Pension Protection Fund. 

“Reducing illiquid allocations is something that has to happen,” said Arif Saad, co-head of UK Investment Strategy at Van Lanschot Kempen. “There are some funds that are now close to buyout and want to get assets off their books quickly and they will be happy to accept a discounted value, whereas others can be more patient and sell in a more orderly fashion.”

--With assistance from Greg Ritchie.

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