In 2023, the UK’s bulk purchase annuity (BPA) market experienced significant growth, with transaction volumes soaring to £50 billion. This is expected to persist for the next five- to 10 years, driven by a greater number of pension schemes becoming ready for transactions, according to Gallagher Re.
The booming market has not only attracted new players but has also spurred innovations in the realm of funded reinsurance, utilized increasingly by BPA insurers to enhance their financial efficiency and competitive stance.
Historically, the BPA market faced challenges with defined benefit (DB) pension schemes that were underfunded due to continuous negative projections by actuaries, increased regulation, and lower gilt yields. However, a reversal in gilt yields has provided a much-needed reprieve, altering the landscape for many pension schemes. Today, these schemes are better positioned financially to engage in BPA transactions, though many still require significant preparatory work to optimize their data and internal agreements for insurer negotiations, it was suggested.
The increase in demand for BPAs has been accompanied by a growing need for resources on the supply side. Insurers are scrambling to expand their teams to handle the influx of transactions, which reached a record 250 in 2023. This demand has outpaced the current market’s capacity, leading to operational bottlenecks despite new entrants following in the footsteps of established players like M&G and Royal London.
This evolving dynamic has also led to a focus on smaller pension schemes. Currently, there are about 5,000 uninsured DB pension schemes, predominantly smaller in scale. These smaller schemes present a unique set of challenges and opportunities. Less than half of current market players are interested in transacting with these smaller entities, partly due to the complexities involved in advising them. This has opened the door for technical innovations and new streamlined solutions tailored to meet the needs of these smaller schemes.
Funded reinsurance has emerged as a critical tool within this context, Gallagher Re explained. It allows insurers to reinsure both biometric and asset risks, optimizing their balance sheets to manage the capital requirements dictated by Solvency II regulations. Furthermore, it enhances pricing competitiveness for BPA bids. This method is increasingly recognized not only in the UK but globally, with varying applications and maturity levels in markets such as the US, Asia, and parts of Continental Europe.
As the BPA market continues to grow, the landscape is evolving with more global and Bermudian reinsurers entering the scene. The challenges of counterparty risk limits and collateral packages remain prevalent, but the focus has also shifted towards innovative, bespoke funded reinsurance solutions that have yet to be fully explored in the market.
