Outlook for the BPA market for the rest of 2024

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Kunal Sood, Managing Director of Defined Benefit Solutions at Standard Life, part of Phoenix Group, comments on the outlook for the BPA market for the rest of 2024:

Last year was a record-breaking year for the DB pension risk transfer market, and while the market has been a little quieter so far in 2024, a strong pipeline heading into the rest of the year should mean a strong finish, with over £40bn of Bulk Purchase Annuities (BPA)  expected to transact by the end of the year.

In light of strong funding levels and attractive insurance pricing, DB pension schemes are increasingly looking for ways to de-risk their liabilities and secure their members’ benefits, with BPA remaining the chosen method for many schemes. Below are some of the key trends we expect to continue throughout the year:

Innovation to leverage expertise and meet market needs
Insurers are continuing to build their teams and invest in technology to improve efficiency and meet the growing demand from pension schemes. This includes building further efficiencies in the pricing process through to the transition from buy-in to buy-out.

Despite the high levels of activity, insurers continue to look for solutions to scheme-specific requirements. Examples include supporting schemes’ liquidity needs, helping members retain links to Defined Contribution arrangements, or providing cover for data and benefit risk. Clear articulation of objectives and focus on the most important areas is key to help the industry craft solutions to these needs.

Illiquid assets continue to require careful preparation and strategy
Illiquid assets continue to represent a significant consideration for many schemes looking to de-risk. For schemes that have enjoyed significant improvements to their funding levels in recent years, many still have illiquid assets which wouldn’t be traditionally suitable for meeting a BPA premium. Indeed, our research¹ echoes this, with EBCs and professional trustee firms saying they found dealing with illiquid asset holdings in the context of a bulk annuity transaction challenging.

Half of the EBCs and professional trustee firms we surveyed said their clients believe deferred premiums are the only viable insurer-side solution to help deal with illiquids. All firms noted that some clients believe holding illiquid assets will prevent them from conducting a buy-in deal.

While schemes’ illiquid assets are not usually a natural fit for insurer balance sheets, there are a range of potential solutions to fit most circumstances. It is important for these schemes to engage with an insurer as early as possible to identify possible options that will enable a scheme to take the next step towards end-game, while exploring scheme-side solutions which can be the most efficient outcome where schemes do not have a burning platform for a transaction to happen quickly.

Larger transactions are commonplace
Since 2021, the market has seen a steady increase in the number of billion-pound transactions, with publicly announced transactions of this size increasing from six in 2021 to nine in 2023. This trend is set to continue, as schemes of all sizes benefit from improved buy-out affordability, including some of the largest DB schemes in the UK.

This year seems set to continue that trade, and we estimate that >£1 billion transactions will dominate the market volumes in 2024, topping the number completed in 2023.

Regulatory developments
While the second half of the year brings with it a new Government, there will be a continuing reform agenda when it comes to the pensions system, with a raft of legislative signposting and regulatory guidance released, including incremental developments to the regulatory infrastructure of superfunds.

Solvency UK reforms are playing through, with the previous Parliament already legislating to increase flexibility regarding which assets qualify for Matching Adjustment (MA). Standard Life’s parent, Phoenix Group, is at the forefront of these conversations. In order to keep this momentum going we have proposed the introduction of an MA sandbox to bring efficiency in exploring the use of a wider universe of assets that are fundamentally suitable for backing annuities and would support the UK economy.²

In the meantime, the Prudential Regulation Authority (PRA) has recently released its latest Supervisory Statement focused on the use of funded reinsurance as well as the launch³ of the next industry-wide stress test which will test these exposures as well as insurers’ resilience more generally. Trustees and sponsors should take comfort in the PRA’s continued monitoring and management of potential emerging risks, which is one of the key pillars underpinning the security of Bulk Purchase Annuities.

While all of these developments are being factored into decision making for trustees and sponsors, we have not yet experienced any impact on appetite for insurance de-risking solutions, as schemes look to capture the opportunity to secure their members’ liabilities with tried and tested solutions.

Conclusion
All signs point to this year being another very busy year for the DB de-risking market, with many trustees and sponsors continuing to use insurance to secure member benefits. Against this backdrop, diligent preparation and early insurer engagement remain vital components in order to successfully navigate this busy market.

Our focus continues to be on close collaboration with schemes to find the optimal solutions to meet their de-risking requirements and provide the very best outcome for the members.

ENDS
 

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Notes to editors

1. Managing illiquid assets during a bulk purchase annuity transaction - DB solutions report: Managing illiquid assets during a bulk purchase annuity transaction | Thinking Forward | Standard Life
2. Solvency UK: the case for introducing a Matching Adjustment Sandbox: Solvency UK: the case for introducing a Matching Adjustment Sandbox | Phoenix Group (thephoenixgroup.com)
3. Life Insurance Stress Test (LIST) 2025 | Bank of England

 

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