Hot topics in the bulk
purchase annuity market:

for insurers and trustees

It will come as no surprise that the bulk purchase annuity (BPA) market is very active. In 2022 the funding of schemes with limited interest rate hedging significantly improved as yields rose, bringing many the ability to pursue buyout a lot sooner than expected.

Pension funds have continued to take advantage of their improved funding positions and 2023 looks set to to be a record-breaking year for new business volumes.

In this update we set out the key issues facing this market from an insurer, trustee, and employer perspective.


Key issues for insurers

Key issues for insurers

1) Demand for buyout 

Let’s start with the first and most obvious area – capacity in the market due to increased demand to buyout. With many schemes coming to market, there are concerns over whether there is the capacity to deal with the demand. Some of the questions being asked include:

  • Are schemes able to get the support from the Employee Benefit Consultants(EBCs) to get prepared to go to market?
  • Do pricing teams have the capacity to price and onboard the deals?
  • Are insurers able to originate the required assets in the volumes assumed in pricing?
  • Can administration teams cope?
  • Are insurers’ risk management processes keeping pace with growth and expanding risk appetites?
  • How much new business can insurers support with their existing capital levels? How might this impact on insurers’ reinsurance strategies and what impact may this have on pricing?
  • What new challenges are created for insurers by potential ‘mega-deals’? Will we see more appetite for from schemes and insurers for multiple insurers to participate in the larger transactions?
  • Does uncertainty around the final outcome of the Solvency II regulatory reform process have implications for insurers’ asset strategies and pricing?

As such, both insurers and schemes need to balance speed with risk. The Prudential Regulation Authority (PRA) has warned the sector not to ‘over indulge’ in new business and to exercise moderation in the short term. However, insurers will not want to miss out by being overly cautious, and new business volumes have the potential to become a source of tension in some firms’ supervisory relationships. 

2) Are The Right Systems in Place

Several factors - the market developing over a short period of time, companies not wanting to miss the boat, and large scale regulatory changes such as SII and IFRS17 - lots of insurers would have built up their pricing and analysis tools quickly on simplier programmes like Excel.

But with ever increasing data volumes, complexity in catering for many schemes and more runs required for analysis, these calculation engines are probably no longer fit for purpose and significantly increase the risks of mispricing deals through lack of controls, automation and openness of the tools. To ensure insurers are not taking onboard unknown risks, they should take the time (while they still can) to put in place robust, flexible calculation processes that can minimise risk whilst increasing capacity to analyse more schemes.

3) Solvency UK reforms

The reform of the UK’s implementation of Solvency II into a tailored Solvency UK system is now well underway. It is likely to have significant implications for many aspects of UK life firms’ regulatory solvency framework. In particular, changes to the Matching Adjustment (MA) rules could have significant implications for insurers operating in the bulk annuity market. 

The details of the MA reform package are only likely to become clear when the PRA consultation is published in September. But the high-level direction of the regulatory reforms have already been set by the government: 

  • Insurers will be granted greater investment flexibility than is the case under the current MA rules, and this could substantially widen the MA investment universe.
  • Conversely, the PRA will be granted new powers to use in supervising insurer’s MA investment strategies, ensuring this greater investment flexibility does not have any negative consequences for policyholder security. 

These reforms are therefore likely to create new investment opportunities and some new regulatory costs for insurers (see our previous blogs on Internal Securitisations and Solvency UK and The Fundamental Spread and the PRA's new supervisory tools here). On balance, we don’t expect this to have a significant net impact on the capacity within the market or on pricing of buyouts.

4) PRA letter on use of funded reinsurance in BPA market

The PRA sent a letter to the Chief Risk Officers (CROs) of UK life firms on 15 June sharing the findings of their thematic review of funded reinsurance arrangements. The letter noted the growing appetite for funded reinsurance (i.e. quota share) in the BPA market and highlighted areas where the PRA considered that the expectations set by their supervisory statements were potentially not being met, stating “we need firms to take actions to improve the way in which they manage the risks in these transactions if they plan to participate in this market”.

In particular, the letter explained that the PRA was mindful that counterparty credit risk may not be being adequately modelled in firms’ internal models. It called for more sophisticated modelling approaches to be developed for counterparty credit risk (such as full look-through modelling of collateral portfolios in internal models). 

The letter also explained that the review had identified key risks relating to the quality of collateral, how well it matched the ceded liabilities, and the extent to which firms would be able to transform the re-captured collateral portfolio into an MA-eligible asset portfolio in the stressed market conditions that would likely accompany recapture.

5) New entrants

There has always been significant interest from life insurers in being key players in the BPA market as this is an important area of growth in an otherwise relatively unexciting market. The current surge in new business volumes is further amplifying the interest from potential new market entrants.

In the ’alternative risk transfer‘ market (including superfunds and other capital-backed solutions), 2022 might be characterised as a year of unfulfilled expectations. Over a year since Clara-Pensions completed its regulatory assessment, it was disappointing to see the commercial consolidation market struggle to get off the ground with a first transaction. 

Some of this is undoubtedly due to the significant changes in financial markets during the summer and autumn of 2022, which led to rapid changes in schemes’ funding levels and tougher conditions for consolidators to demonstrate that their proposals are consistent with The Pension Regulator’s (TPR’s) gateway principles. It remains to be seen whether the slow progress to date is purely market-driven, or possibly symptomatic of any lack of trustee and sponsor appetite for such alternative risk transfer transactions.

6) Cyber & resilience testing

Cyber and information security has been a very hot topic for a while. But the recent Capita cyber-attack - which is said to have included the personal data of over 300 pension schemes – has returned the topic to the forefront of the sectors mind. Couple this with increased demand and capacity issues, pension trustees need to understand what cyber risk management is in place at the insurers, and insurers need to ensure that their cyber risk management framework is robust.

Is cyber risk management led from board level? Are there robust governance mechanisms built-in to manage the four key pillars of people, process, technology and leadership? Is cyber resilience embedded across all levels of the organisation, not just at an IT level? 

Closely linked yet wider ranging is the need for a considered and iterative resilience strategy. While regulatory obligations may be well under control, have insurers considered more operational considerations or future risks that could impact their continuity and resilience? 

  • What impacts could AI bring to bear on insurers and their competitors now and in the future?
  • How might interconnected risks and incidents impact on continuity? 

While stress testing and scenario analysis are useful tools, running exercises that also consider behavioural and people risks helps to ensure a more robust approach to building and enhancing resilience. 


Topical issues for trustees
of DB pension schemes

Mainly due to the gilts crisis in October 2022, trustees’ focus has been on their Liability Driven Investment (“LDI”) portfolios, ensuring the robustness of the strategy. With rising long-term gilt yields off the back of interest rate rises and inflationary pressures, collateral adequacy has been at the forefront of trustee considerations both from a liquidity perspective as well as ensuring hedging levels remain adequate to support funding position risk. 

A related point is that many pension schemes have, however, also seen improving funding positions. As a result, conversations around buying out pension scheme liabilities with insurers have been brought forward, or at least have moved higher up on trustee agendas. 

Another hot topic has been on ESG factors and in particular climate change, where trustees are focussing more on these areas and how these risks could impact overall longer-term investment strategy. Increased regulation, such as the introduction of the Taskforce for Climate-Related Financial Disclosures (TCFD), has prompted many pension schemes (>£1bn of assets) to increase their knowledge and governance spend in this area. 

Many smaller schemes have incorporated similar climate risk considerations consistent with the drive towards carbon neutral stances, which many sponsors of pension schemes have been adopting. ESG focus has also been topical when deciding on the choice of buyout/insurance provider when securing pension scheme liabilities, and so definitely an area of strong focus throughout scheme journey plans and beyond. 

Furthermore, given the challenging economic environment, including the Russian-Ukraine war and cost of living crisis, pension schemes are having to increasingly consider investment strategy on a regular basis, to determine an approach to enhance return whilst balancing risks. This has meant increased focus on the safer income-generating type assets. 

It has also involved understanding the challenges of alternative asset classes such as renewable energy and infrastructure against the current economic backdrop whilst being aware of opportunities that may enhance value. Having more alternative exposures may prove challenging from a liquidity perspective if buying out pension scheme liabilities is brought forward. Therefore, discussion with insurers in this area has also been increasing as it may have an impact on the viability of proceeding with the deal. 

Over the last twelve months, many pension schemes have found themselves to be better funded than might have otherwise been expected. Schemes and sponsors are now eyeing bulk annuity transactions in much shorter timescales. The demand isn’t just coming from fully funded schemes, but also from corporates looking at transactions as an opportunity to settle liabilities in more favourable conditions, where the absolute size of a top-up contribution has been shrunk by improved scheme finances and the reduced overall scale of pension liabilities due to higher interest rates. 

Schemes would typically work with their advisers and administrator for six to twelve months to prepare for approaching insurers. These preparations allow for governance structures to be agreed, data cleansing to be undertaken and a detailed benefit specification to be produced and legally reviewed. Indeed in years gone by, schemes journey plans have incorporated transaction preparations over an elongated period, allowing for tasks to efficiently sequenced and resources identified. 

In this new world however, schemes may want to lock into current insurer pricing quickly, but aren’t practically ready. There is then a balance to be struck: delay market approach to undertake thorough preparations, or focus on essential activities only. To complicate the picture further, ‘essential’ activities will vary between schemes, partly due to the scheme’s data quality and benefit complexity, the availability of scheme assets that can be used to pay the initial premium, but also partly due to transaction affordability, and the sponsor’s requirements regarding price certainty. 

Although data analysis has already completely revolutionised our everyday retail journeys, in the workplace many key decisions are still based purely on anecdotal evidence or instinct alone. Slowly but surely, the juggernaut is turning and analytics is on the rise in the workplace. Indeed, we are heading towards a new destination where Employer DNA will deliver sustainable, robust and innovative strategies.

"We are heading towards a new destination where Employer DNA will deliver sustainable, robust and innovative strategies."

I started by saying that “DNA is the very material that defines our uniqueness – the very substance that carries the information we need to survive and to thrive.” The same is true for Employer DNA. As you work your way up the rungs of the data analytics ladder, the closer you get to the top, the more you’ll realise that your Employer DNA really does contains the insights you need to both survive and to thrive. 

How schemes identify their preferred insurer is changing too. The market is segmenting to reflect insurers’ preferences and higher case volumes. It’s now far more common for schemes to reduce the number of insurers involved earlier in the process, as so to work with a smaller number of engaged bidders. This is because insurers are less willing to engage where their chance of winning is lower, as a result of more parties being involved. 

Trustees are also able to have regard to wider insurer offerings. In years gone by, price was commonly king, as where a sponsor top-up is required, there is typically pressure to select the cheapest provider. Whilst price is still important, schemes finding themselves in surplus at the point of transaction can find themselves able to take a more holistic view. Trustees may elect their preferred insurer based on a wider range of considerations such as price, the member experience, administration services, and ESG considerations. 

Bulk annuity provider services

We are recognised as a leading adviser to the sponsors and trustees of UK defined benefit (DB) pension schemes. In addition, our insurance consulting team has extensive experience of supporting UK life companies.

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Our authors

This article contains contributions from experts across BW, including Craig Turnbull,
Andrew Blackburn, Rosie Fantom, Karla Gahan and Tamaryn Driver.
Find out more about our insurance consulting services here, and if you would like
any further information on the above topic, please contact Kim Durniat.

Kim Durniat
Partner and Head of Life Consulting,
Insurance & Longevity Consulting

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