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UK businesses are set to offload a record £70bn of pension risk to insurers this year as healthy scheme funding levels support a flurry of dealmaking, according to a new forecast.
Funding levels of defined benefit pension schemes have improved after higher government bond yields reduced the value of future liabilities. That has made bulk annuity deals, where companies sell their pension schemes to insurers who then take responsibility for meeting pension obligations, more attractive.
Companies have sought to hand over their pension liabilities to insurers because it means they no longer have to report the pension surpluses or deficits in their own accounts — or assist with any shortfall — while such the deals have become an important source of revenue for insurers.
Pension consultants WTW has forecast a combined £70bn in sales this year, made up of £50bn of bulk annuity transactions and £20bn in longevity swaps, where pension schemes insure against members living longer than expected, from just under £60bn in 2024.
Forecasts for a buoyant 2025 follow volumes that were slightly lower than predicted last year as some employers decided to keep their schemes or delay buyouts, in anticipation of higher surpluses.
The Conservative government last spring explored options to allow companies to access scheme surpluses, estimated to be worth over £100bn on a low risk measure, causing some well-funded schemes to run for longer in order to take advantage of the expected improved access.
Chancellor Rachel Reeves is expected to soon lay out plans to allow companies and scheme members to benefit more from surpluses in defined benefit schemes.
Shelly Beard, managing director in WTW’s pension transactions team, said funding levels had “generally continued to improve” over the past year, enabling companies with smaller schemes to transfer their pension obligations to an insurer.
Royal London and Utmost both completed their first bulk annuity transactions last year, bringing the total number of insurers operating in this market to 10. Last summer private capital giant Brookfield applied for a licence to operate as a UK insurer to enable it to make bulk annuity deals.
“The defined benefit de-risking market is the envy of the global insurance world . . . [It is] bigger than any other, including the US,” said David Richardson, chief executive officer at Just Group, which completed 129 bulk purchase annuity transactions last year.
Over 35 per cent of the UK’s 4,900 DB pension schemes, which manage a combined £1.2tn of assets, are fully funded on a buyout basis, meaning they could afford to handover their schemes to an insurer, according to the Pension Protection Fund, which was set up by the government to compensate pensioners if their employers’ scheme fails.
Bumper bulk annuity transactions have also attracted scrutiny from regulators, with the Prudential Regulation Authority earlier this month warning of the risk of funded reinsurance deals where UK life insurers pass some of their pension liabilities to overseas reinsurers.
Concerns include whether, in the case of a reinsurer’s default, assets brought back to the books of UK insurers would be sufficient to cover their risks.
Charlie Finch, partner at consultancy LCP, said his firm had been lobbying the PRA to give better disclosure on funded reinsurance as “a vacuum of information has made people worry more than they might need to”.
