Companies shifting pension assets en masse to insurers seems to be a trend that will not buck anytime soon in the U.K., though an evolving marketplace, a new chance for firms to access their surpluses for non-pension purposes, and warnings by the insurance regulator are all signs that this is far from a static sector.
The start of this year has been strong for pension risk transfer. In January, Sanofi Pension Scheme, Earley, England, completed a £1.4 billion ($1.7 billion) buy-in with Legal & General, securing the benefits of 4,900 recipients and 5,600 deferred plan participants.
2024 was also a “bumper year” for the U.K.’s pensions risk transfer market, with £40 billion to £50 billion of buy-ins (a partial transfer of a sponsor's pension assets) and buyouts (full transfer) for the third year running, and over 300 transactions for the first time, according to a report from consultancy Lane Clark & Peacock.
As a sign of the market's growth, Martin Bird, a senior partner at Aon, identified difficulties with sheer “human capacity” to process deals as the single biggest thing holding back the sector.
According to an annual Willis Towers Watson report, the U.K. defined benefit derisking market is predicted to see £50 billion in bulk annuity transactions and £20 billion in longevity swaps in 2025.
Buy-in and buyout in pension risk transfer is no longer the only game in town, however. Some pension funds are exploring alternatives such as superfunds, with Wates Defined Benefit Pension Scheme, Leatherhead, England, transferring £200 million in assets to Clara Pensions, and others looking at capital-backed journey plans, in which private companies put capital aside in order to help the pension plan achieve their end game.
Then there's the new option for certain firms which, under new government proposals, will be able to access their pension fund surpluses to invest in the U.K. economy or to provide additional benefits for participants.
London-based asset manager Schroders, which has AUM of $979 billion, announced on Jan. 31 that it had committed to running on its DB fund and would allow the trustee of the Schroders Retirement Benefits Scheme to use about 10% of its surplus per year to support defined contribution participants' funding. Guardrails will be put in place to ensure the DB fund "remains in a healthy position," a news release said, such as regular funding level checks and a way of recouping contributions if the funding level were to deteriorate.
As of Dec. 31, the DB section of the Schroders pension plan had £640 million in assets.
“It's been pretty challenging for trustees to keep pace in terms of the new developments in the landscape. It used to be simpler; you run on or you do a buyout with an insurance company. Now the market has evolved, there are many more options, and that makes life much more difficult,” said Jeremy Rideau, EMEA head of liability-driven investments and derivative solutions at State Street Global Advisors, which had $4.73 trillion in assets under management as of Sept. 30.
A defined benefit trustee survey, published by SSGA in January, showed that while buyout and run-on remained the most favored options, collectively capturing 81% of responses, 17% of trustees were targeting superfunds or capital-backed journey plans.
Clawing back the surplus
In January, the U.K. government announced changes that would allow businesses to tap billions of pounds currently trapped in defined benefit funds, under proposed reforms to access surpluses.
U.K. occupational DB funds had an aggregate £226.2 billion ($284.2 billion) surplus as of Dec. 31 according to the Pension Protection Fund’s 7800 index, with 74% of the index’s 4,969 plans in surplus. Under current rules, a pension fund must have passed a resolution before 2016 in order to access a surplus.
The intention is for firms to reinvest these funds into the company, part of a government push to encourage national growth and giving the opportunity for funds such as Schroders to move funds out of a pension plan if it was so desired.
If enacted, this legislative change would have the potential to impact the pension risk transfer market, as corporate DB schemes may look to reinvest surplus rather than shift assets to an insurer’s portfolio.
“There's definitely going to be quite a lot of plans that see (taking back surplus) as attractive. However, there are still going to be a huge number of plans that still just want to buy out. They don't want the risk on their balance sheet anymore. So while some plans may pause projects to think about this new option, there's still going to be more than enough that still want to do buy-in or buyout to keep everyone busy,” said Shelly Beard, a managing director specializing in bulk annuity and longevity hedging at Willis Towers Watson.
While Beard and WTW had predicted £50 billion of PRT business in the U.K. in 2025, and she said she would not revise this estimation downward in light of the announcement on easing access to pension surplus.
Similar projections for the PRT market have been made by consultancy firm Lane Clark & Peacock. Charlie Finch, a partner at LCP specializing in pension risk transfer and strategic advice, is likewise reluctant to adjust his estimations.
“If there was a substantial change (due to the proposed surplus access revisions), then we would revise those PRT potentials. If those upward projections are smoothed out, in some ways we think that's good for the market as it takes out some of the heat and the sort of rapid growth and makes it a more steady market over the next decade. But if you're an insurance shareholder, having the business in seven years is not as good as having it in next year,” he said.
PRA oversight
In July, the U.K.’s Prudential Regulation Authority, responsible for the regulation of financial services such as banks and insurers, also expressed concerns that funded reinsurance transactions by U.K. life insurers could, if not properly controlled, lead to a “rapid build-up of risks in the sector.”
Undewriters of pension risk transfer use funded reinsurance to increase the capacity to do deals and access assets they would otherwise be unable to.
While no regulations limiting pension risk transfer itself have as yet been put forward by the PRA, it is clearly an area of the industry on their radar.
“It's not unreasonable to expect a regulator to opine on the risks attached to rapid growth. I don't see it as a concern that the regulator is doing absolutely what you would expect it to, which is to make sure that we've got a sound, robust market, one that it is able to properly support the demand and the flow of business that is going through into the insurance market,” said Bird.
