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BPA Market Projected To Cover £1Trn Of DB Liabilities By Early 2030S

BPA Market Projected To Cover £1trn Of DB Liabilities By Early-2030s

Monday, 29 April 2024

The bulk purchase annuity (BPA) market continues to go from strength to strength, as pension scheme trustees turn to BPA transactions as part of their de-risking strategy. Since 2020, the higher interest rate era has helped to significantly reduce pension scheme liabilities and has also boosted funding ratios. This has made scheme buy-outs more affordable and heightened the demand for Defined Benefit (DB) pension schemes to de-risk. We explore the current market.

As a consequence of the much-improved environment for DB schemes, industry experts are predicting the amount of UK DB schemes covered by insurers through BPA deals could get close to £1trn by the early 2030s, meaning an estimated six million Britons will have their liabilities insured.

Accelerated BPA market growth continues

According to analysis from Lane Clark & Peacock (LCP), 2023 was a record year for UK pension risk transfers, with £49.1bn of buy-ins/outs reported in insurers’ annual results. This comfortably surpasses the £43.8bn milestone reached in 2019 and has led to suggestions that deals valued at more than £50bn a year will now become the new normal.

The trend toward mega bulk annuity deals set to continue

In fact, some consultants have suggested that, after an exceptionally strong first quarter, total BPA transactions this year could hit the dizzying new height of £80bn. This estimate is being driven by a record number of deals valued at £1bn-plus already announced, and with insurers reporting strong pipelines of more mega-deals to come. Therefore, it’s unsurprising that new entrants are starting to flock to the BPA market, and insurers are scaling up to meet the demand.

Key players are joining the BPA market

Thanks to the favourable conditions, several key players are entering or expanding into the BPA market. In September 2023, M&G announced it was re-entering the bulk annuity market, becoming the first new entrant since 2017. In just six months, M&G has announced three bulk annuity deals.

In January 2024, Royal London announced its expansion plans after completing a deal with Royal Liver worth £246m that covered 3,000 deferred pensioners and current members of its DB scheme. Royal London is now pushing further into the BPA market, and said in its latest annual report, ‘…we have extended our annuity capabilities in advance of an intended participation in the bulk purchase annuities market, focussed on providing a competitive solution to the trustees of defined benefit pension schemes.’

Increased competition in the BPA marketplace

This influx of providers into the BPA market is expected to help foster a more competitive and vibrant market for BPA transactions. It should also help give DB scheme trustees more choice, although this could place a greater burden on trustees as they try to assess newer market participants with more experienced and established competitors.

Innovative structuring by providers has helped create a particularly competitive environment. However, hoping to compete on attractive pricing alone may not be enough. Providers will, most likely, be expected to demonstrate the robustness of their professional capabilities across a range of different operational areas and disciplines, including balance sheet strength, administrative aptitude and capacity, buy-out experience, environmental, social and governance (ESG) factors, brand awareness, and industry reputation, to name a handful.

A growing BPA market still presents challenges

While the current conditions are exciting for the DB industry, and welcome news for DB scheme members, trustees may feel under increased pressure to make sure they choose the best-placed counterparty for their pension schemes, based not just on price, but also on capabilities. There may also be some capacity challenges for insurers, and DB schemes valued at less than £1bn may feel neglected in the rush to lock in the mega-deals. Trustees will, therefore, need to keep cool heads and make sure they are fully prepared on their de-risking strategy, requirements and objectives. 

Innovative retirement solutions from EQ

For over 187 years, EQ has been working with pension schemes, members, managers and trustees to deliver innovative retirement solutions. We are pension data experts, providing data solutions on sensitive and highly complex projects and specialising in managing challenges at scale. With technology at its core, our pension platforms support our clients with all their pension administration needs. If you want to work with a trusted pensions partner on any aspect of de-risking, buy-in and buy-out or bulk annuity administration, get in touch.

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