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The Dynamics At Play In The BPA Market

The Dynamics At Play In The BPA Market

Wednesday, 20 December 2023

As pension funds take advantage of their improved funding positions and look to pursue buyout sooner than expected, 2023 new business volumes continue to register seismic shifts. With buy-ins and buy-outs on track to hit record levels, the de-risking market has undoubtedly undergone a transformation.

The bulk purchase annuity (BPA) market has significantly altered, with the growth witnessed reinforcing the fundamentals of the UK Life Insurance sector. With pension de-risking solutions now more affordable due to higher funding levels, and higher interest rates leading to improved pricing from insurers, new business volumes have reached record highs. But how are insurers responding to the acceleration in demand?

Charlotte Gerken, Executive Director of Insurance Supervision at the Bank of England, summed it up when she spoke about insurers continuing to navigate the balance of “short term financial and reputational incentives to grow rapidly, with long term and enduring financial strength, to meet the long term needs of policyholders and the economy.”

Transaction size

Although insurers have been challenged from a capacity perspective, impacting their ability to quote and triage, transaction opportunities have been robustly contested. Schemes are having to work hard to present themselves optimally to prospective insurers, in order to gain insurer engagement and competitive pricing and terms.

Although larger (£1bn+) transactions have come to the market this year at unprecedented rates, a healthy stream of smaller and mid-sized schemes have dominated, with insurer capacity still being made available for these smaller deals. In fact, their more diminutive size has enabled these schemes to be nimble and enter the market more quickly and, with insurers making strides to automate and streamline their processes for smaller transactions – including extending their reinsurance flow treaties – they have been well placed to write greater numbers of smaller transactions.

Natural controls at play

It is widely appreciated that several factors will combine to naturally control the rate of growth in the market, which will support long-term sustainability. These contributing factors include the efficient managing down of illiquid assets, continued growth in insurance capacity and supply, aligned with the needs of the market and the undertaking of data and benefit assessments, approached in a staggered way with increasing use of technology. Indeed, certain trends are emerging within the market.

Market trends

  • Intensifying competition - the competitive marketplace has seemingly shifted as the surge in demand has pushed insurers to run at, or close to, full capacity, enabling them to be more selective about which schemes they quote on. This has placed pressure on schemes to up their game regarding transaction preparedness to successfully secure competitive quotations from several insurers.
  • Shift to full scheme transactions – As funding levels have improved, full scheme deals are more dominant, especially as partial buy-ins are more challenging to accommodate following changes to collateral limits.
  • Illiquid assets – Acceleration in endgame strategies has brought the challenge of illiquid assets to the fore. Careful planning is required if these assets are needed to fund a short-term buy-in transaction.
  • Pricing – It continues to be competitive due to the surge in activity, with well-prepared schemes subject to intense interest.

Residual risks cover – Although costly and intensive to implement, this can be attractive as it provides additional contractual protections, with schemes increasingly weighing up the benefits.

Looking ahead – “A constantly evolving market.”

As the funding levels for many schemes allow them to position themselves for de-risking activity at an earlier stage, Standard Life, with a solid pipeline of incoming work, consider the situation. Managing Director of DB solutions and reinsurance Kunal Sood said of the activity in the market, “With no end in sight, and as the industry starts looking ahead to 2024, for trustees and sponsors looking to de-risk, the priorities should remain on solid preparation, and flexibility, to ensure they are effectively navigating a constantly evolving market."

With momentum set to continue into 2024 and the marketplace remaining competitive, insurers are likely to continue to win more schemes on a selective participation basis and enjoy a diverse new business mix. Expectations are that a stream of well-run and efficiently executed smaller deals will provide a steady flow alongside the ad hoc deal flow from larger schemes. New regulation and guidance will be presented and embedded in the market, including changes to the insurance regulatory environment, which will require careful consideration.

Innovative retirement solutions

In the current landscape, market expertise is more valuable than ever before in helping schemes navigate the market. EQ have been working with pension schemes, members, managers and trustees to deliver innovative retirement solutions, for over 187 years. We are pension data experts used to providing data solutions on sensitive and highly complex projects and we specialise in managing the challenge at scale. With technology at our core, our pension platforms can support clients with all their pension administration needs. To collaborate with a trusted pensions partner, if you require support with any aspect of de-risking - buy-in and buy-out or bulk annuity administration - get in touch.

Find out more about how EQ Retirement Solutions is transforming the retirement and pensions markets with leading administration and technology solutions.

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