The pension risk transfer market in the UK delivered yet another solid year in 2024 with consultants WTW forecasting that, when all is said and done, £48-50bn of deals will have been completed, which could mean a record. Greg Winterton spoke to Mark Sharkey, BPA Origination Lead at Royal London, to get his views on the state of the market and its outlook for 2025.
GW: Mark, last year was yet another high-activity year in the UK’s bulk purchase annuity market. Just how long can this go on for?
MS: There is every reason to expect the bulk annuity market will be as vibrant in 2025 as it has been in recent years. There are lots of pension schemes now ready to transact or preparing to in the months and years ahead. We also now have more insurers in the market than ever before. So, there is plenty of supply and plenty of demand. It’s worth remembering that around £1trn of defined benefit pension liabilities remain uninsured in the UK, so the potential demand is significant.
We expect to see £40-50bn of business across the market again this year, but there could be fewer multi-billion transactions with more sub-£500 million transactions making up the difference.
GW: Royal London itself entered the market officially in 2024, writing deals mainly in the smaller end of the market so far. What are some of your thoughts on what should be top of mind for smaller scheme trustees as they approach the BPA market for a quotation?
MS: The market is very busy right now, with over 200 transactions being completed each year for pension schemes within our target premium range of up to £500m. However, we don’t envisage a scenario where a well-prepared smaller pension scheme is unable to gain traction with an insurer, and that’s backed up by what we’re observing in the market.
Most insurers in the market run similar triaging processes when deciding which pension schemes to provide a quote to. Generally, insurers will prioritise opportunities with good quality data, a clear presentation of scheme benefits and good governance and brokering processes.
What we’d also recommend to trustees is that they can demonstrate they have taken the time up front to understand the offerings from insurers and how they differ. This encourages insurers to reciprocate and lean in to work with trustees that are well aligned to their proposition.
GW: Given the excellent funding status of many schemes, there has been a growing amount of talk around whether to de-risk at all. What’s your message here?
MS: Ultimately the decision on whether to de-risk is one for the pension scheme trustees to make, as they carry out their fiduciary duties and ensure the long-term security of members’ benefits. There will be instances when a bulk annuity transaction isn’t the optimum outcome for a pension scheme and trustee board. However, many of the trustees we speak to are keen to lock in the funding gains that have emerged over the last few years. Many trustees remember the surpluses of the 1990s and how quickly they disappeared.
Most trustees I speak to are from pension schemes of up to a few hundred million pounds. The cost of running these pension schemes on can be prohibitively high and often the corporate sponsors just simply don’t want to be investing so much of their time managing these pension schemes, they’d much rather be focused on growing their businesses.
GW: How much are smaller schemes paying attention to the investment strategy of the insurers that they might eventually transact with? Are there any misconceptions here, or lack of understanding on behalf of the scheme trustees?
MS: The investment strategies adopted by bulk annuity providers need to balance the returns required to offer attractive pricing with the regulatory regime they must comply with. This can often lead to differences between the assets held by a pension scheme compared with the typical insurer, even though both seek to match defined benefit cashflows. Insurers might typically weight their portfolio more towards credit and less towards gilts compared to the typical pension scheme, whilst certain illiquid assets held by pension schemes are not permissible under Solvency UK.
However, I think investment consultants have really upped their game in recent years, in terms of getting pension schemes of all sizes ‘transaction ready’. Many trustees we speak to have already undergone a process of aligning their portfolio to something that looks more like an insurer strategy, but good insurance partners will still do their best to retain an element of flexibility when working with pension schemes on a transaction.
GW: Lastly, Mark, what is yours and Royal London’s outlook for activity in the space this year? When 2025 is said and done, do you think a new record will be set in terms of aggregate deal value, or will there be a plateauing? Or a contraction?
MS: I think aggregate volumes have reached a fairly steady level, so would expect something similar to previous years when the industry gets the calculator out and tots up the final scores.
Whether 2025 represents a new record, a contraction or a plateau, I’m sure all the headlines will reference the total amount of liability that has transferred to the bulk annuity market. But ultimately, the main focus should be on the number of members that have reached buy-in and achieved greater benefit security as a result.
Mark Sharkey is BPA Origination Lead at Royal London
