PRA calls for stronger risk management
With total transaction volumes expected to have reached between £45bn and £50bn in 2024, the BPA industry is seeing increasing innovation and new participants entering the market. However, as the market grows, the Prudential Regulation Authority (PRA) has outlined expectations for BPA insurers to ensure they can manage increased volumes without weakening financial stability. The regulator remains particularly focused on the use of funded reinsurance, which allows insurers to transfer risks to external reinsurers. While this tool can support market growth, the PRA has warned that improper use could lead to systemic risks.
Growing demand and innovation in the pension risk transfer market
The UK pension risk transfer market is expected to surpass 300 transactions in 2025 for the first time, as more pension schemes seek to de-risk. Improved funding levels, largely due to rising yields, have made insurance an increasingly attractive option for schemes of all sizes. In response, insurers are introducing new solutions, expanding their offerings and attracting new market entrants to keep up with demand.
However, in its annual ‘Dear CEO’ letter to insurers, published on 9 January, the PRA said that some insurers are not yet fully meeting expectations set out in July 2024, and called for tighter risk controls to manage the complexities of a rapidly growing market. In some cases, individual counterparty exposures could push firms below their solvency risk appetite if a reinsurer were to default. The PRA expects rapid progress in addressing these gaps while maintaining a balance between expanding market capacity and ensuring policyholder protection.
Beyond higher transaction volumes, there is also a growing focus from the PRA on enhancing support for pension scheme members. Insurers are expected to expand options for retirees and improve access to independent financial advice, ensuring members receive the guidance they need when approaching retirement.
Adapting to growth and ensuring a seamless member experience
Aon has highlighted six priority areas for bulk annuity insurers in 2025, aimed at maintaining robust insurance offerings while managing the sector’s rapid growth. One of the key areas of focus is enhancing the experience for pension scheme members. Recent improvements have expanded the retirement options available, and this flexibility is increasingly influencing schemes’ choice of insurance providers. As the volume of transactions rises, insurers must ensure their operational capacity keeps pace, particularly in supporting the transition from buy-in to buy-out without disruption for members.
Innovation in managing illiquid assets
Another challenge is the transition of pension schemes holding illiquid assets, particularly those that have reached their endgame sooner than expected. The costs and difficulties of unwinding complex investments can make moving to insurance a costly process. Aon has called for further discussions within the industry to explore ways of mitigating these risks, reducing delays and improving value for pension schemes.
A critical year ahead for the bulk annuity market
With strong demand and increasing regulatory scrutiny, 2025 will be a defining year for the BPA sector. The PRA’s recent letter to insurers reinforced the importance of maintaining rigorous pricing discipline and strong risk management practices amid heightened competition. Ensuring that growth does not come at the expense of financial stability is essential to safeguarding policyholder protection.
The challenge for insurers will be to continue innovating and expanding their offerings while maintaining robust risk management practices. By addressing regulatory concerns, improving transparency and enhancing member support, the industry can ensure a sustainable and resilient future for pension risk transfer in the UK.
Headwinds for the market
Luke Carter, Regulatory Consultant commented,
“The BPA Market is vibrant and growing. The introduction of the pensions dashboard will help members to keep up to date with their pensions through the transition.
However, there are areas that could impact the growth of the market – the current high interest environment allows for longer run-on plans. Then there’s the potential Government plans for scheme surpluses. It will be interesting to see what is planned for sharing a surplus and what potential impact this could have on schemes and their members.”
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