Insurers ‘stretched’ as UK pension de-risking demand rises

Insurers in the pension risk transfer sector face headwinds from stretched capacity and potential changes to Solvency II rules, according to consultants.

In the first half of this year more than £12bn (€14.2bn) worth of bulk annuity transactions were reported, according to EY Parthenon, up from £8bn in the first half of 2021. The increase was partly due to improved market conditions, said Leah Evans, EY Parthenon’s head of pension risk transfer.

“Deal pipelines are continuing to fill up quickly for the second half of the year, suggesting that 2022 has the potential to close with the highest annual volume transacted in the history of this market,” Evans said.

Strong competition among insurers combined with a rise in bond yields – which has driven down liabilities – have helped some defined benefit (DB) schemes get closer to full funding, according to a quarterly update from consultancy group Aon. The firm predicts that 2022 could see transactions totalling approximately £35bn, below the record total of £44bn from 2019.

The recent spike in demand has stretched some insurers’ capacity to process transactions, according to Aon. Teams responsible for pricing transactions are struggling to meet demand, the consultancy’s report said, meaning insurers were unable to “keep up with the current levels of demand”.

This has also made it harder for smaller schemes to attract the attention of insurance companies. Transactions worth £100m or less have been on the rise in recent years due to insurer innovation, but Aon warned that schemes were “having to compete harder for insurer engagement and potentially show flexibility over their auction timing and form”.

Meanwhile, UK authorities are consulting on changes to the Solvency II regime for the country’s insurers, which could have a significant impact on how DB risk transfers are priced.

EY Parthenon’s Evans said potential rule changes “may lead to changes in supply or demand over the next 12 months” as the outcomes of consultations emerge.

However, Evans said insurers, were “continuing to innovate and streamline their processes” to address the current challenges. “For schemes, the message continues to be that good preparation is key to a successful transaction,” she added.

Chris Anderson, EY’s bulk annuity consulting lead, added that insurers had been investing heavily in their teams – and even indicated that there were “several prospective new entrants exploring entry, which could shake up the market in the medium term”.