Changes to the economic climate witnessed over the last 18 months or so have created an extremely favourable backdrop for the BPA market. A period of higher interest rates has effectively acted to reduce the value of pension scheme liabilities and boosted funding ratios; this has improved the affordability of buy-outs and thereby increased scheme demand to de-risk. At the same time, innovative structuring by providers has helped create a particularly competitive and dynamic market for BPA transactions.
As a result of these developments, 2023 looks set to be a bumper year for the pensions risk transfer market, with early data showing strong growth in both the number and size of deals completed across the first six months. Indeed, analysis of insurer results suggests January–June 2023 witnessed record-breaking volumes, with more than £20bn of buy-ins and buy-outs reported. This represents the highest ever recorded first-half figure for the bulk annuity market.
Further growth expected
Recent research conducted by Standard Life also suggests there is likely to be a further surge in bulk annuity deals over the coming years. The survey of 50 pension trustees, each managing Defined Benefit (DB) schemes with assets of over £100 million, found that more than 80% of scheme trustees expect to approach an insurer about de-risking within the next five years.
Commenting on the survey, Standard Life’s Managing Director of Defined Benefit Solutions and Reinsurance, Kunal Sood, concluded that, “BPA deals are now a near-term solution for many DB schemes.”
Mr Sood also noted that there are many factors scheme trustees need to consider when it comes to their de-risking strategy, adding, “It is crucial that schemes prioritise preparation and ensure they have clarity on their requirements and objectives. This will help schemes keep pace in a fast-moving market and ensure their de-risking journey is smooth and successful.”
Speaking at the Conference on Bulk Annuities earlier this year, Charlotte Gerken, the Bank of England’s Executive Director, Insurance Supervision and chair of the Prudential Regulation Authority’s main executive committee, also acknowledged that the BPA market is in a period of accelerated growth.
She also emphasised the critical role insurers take on when they commit to providing financial security to millions of annuity policyholders. She also urged the industry’s senior managers to balance short-term financial incentives with these long-term commitments and to not be tempted to “over-indulge” in new business in the short run.
Senior management responsibility
Ms Gerken went on to outline a number of potential areas of concern which, she argues, call for particularly effective governance, business and risk management. These include an expansion of BPA insurer risk appetites, an increased reliance on third party capacity and greater interconnectivity with wider financial markets. In conclusion, she highlighted the Regulator’s desire to strengthen senior management accountability and enhance market discipline within this area of the insurance and pensions industry through the implementation of the Solvency UK package.
Innovative retirement solutions
For over 187 years, EQ have been working with pension schemes, members, managers and trustees to deliver innovative retirement solutions. We are pension data experts who are used to providing data solutions on sensitive and highly complex projects and specialise in managing the challenge at scale.