While the UK’s pension risk transfer (PRT) market is motoring on at a heady clip, across the Irish Sea, Ireland’s nascent market is firmly in gear – but is yet to put its foot on the accelerator pedal.
The paucity of trustees exploring de-risking plans has been attributed to both the relatively small pool of defined benefit (DB) schemes in the Republic of Ireland and local prudential regulations. That could be about to change, though, as scheme funding levels improve and administrators watch with interest the rapid uptake of bulk annuity purchase trends among similarly sized British schemes.
“The Irish pension risk transfer market is at a relatively early stage but is an evolving and competitive market,” said Ian Moynihan, Director of Propositions, Employer Solutions at Irish Life.
The potential for an Irish PRT market is undoubtedly there, argue experts. With around €70bn invested in DB schemes, capital is available, even if it is a fraction of the estimated £1.5trn of assets in UK schemes.
And deals have been done. About €2.2bn of Irish DB assets were absorbed by insurers in the past eight years, according to Irish Life estimates. And with the stronger funding positions of the nation’s schemes and the growth of the broader pension market – at around 3% in the fourth quarter of last year to €146bn – expectations are high that the Irish PRT market is poised to move up a gear.
“The last 18 months have seen an increase in activity as measured by quotation requests and transactions, driven by several factors,” said Moynihan.
“These include improved scheme funding positions and consequently attractive pricing; an alignment of corporate and trustee views, and scheme sponsor experience in other markets.”
Hopes for growth in the local market have been raised by the experience of smaller schemes in the UK, which have accounted for a majority of the record levels of transactions in the past two or three years. While the market has seen ever-larger deals struck by large corporate and public bodies, sub-£100m transactions accounted for about four fifths of the £50bn of risk transfers in 2023.
That’s been aided by the emergence of streamlined, templated buy-in solutions that have enabled insurers and advisers to complete more deals quicker.
“Many suggest [slow PRT growth in Ireland] is because the market is too small to support large-scale transactions like you see in the UK [although] recent smaller scale transactions in the UK suggest that there could be opportunities for growth,” said Richard Kelly, Partner at Ogier.
Light at the end of the tunnel is also provided by the experience acquired by insurers based in Ireland which have sister companies that are active in the UK PRT market; Aviva, Canada Life and Standard Life, to name just three.
“That suggests that the expertise is available,” said Ogier’s Kelly.
Regulations in Ireland, which do not apply to the UK, have also put the brakes on the development of the Irish PRT market.
The Institutions for Occupational Retirement Provision II (IORP II) directive and its review have placed stricter governance and risk standards on schemes that have raised the administrative burden and costs to sponsors and trustees.
“It is fair to say that the market has not grown as quickly as might have been expected in light of improvements in scheme funding levels, possibly due to externalities like the Covid pandemic and IORP II compliance taking up trustee and sponsor bandwidth,” said Moynihan.
Other regulations have been cited as reasons why the Irish market is growing slowly, including the EU’s Digital Operational Resilience Act (DORA), which is aimed at bolstering the resilience of financial companies’ information and communication technology risks, for example.
It is arguable, however, that the increased costs of complying with new regulations could encourage schemes to move towards buy-in and buy-out to avoid the additional overhead of compliance. At the same time, the IORP II directive’s requirements for improved governance and data readiness would arguably make schemes more attractive to insurers because much of the administrative preparation needed for buy-in and, further down the road, buy-out, would already have been completed.
However quickly the market improves, it will have different characteristics than in the UK. De-risking growth in Ireland’s DB schemes is likely to be short-lived because there are so few remaining. While DBs had been the backbone of pensions provisions, “over the past two decades, schemes have closed to new entrants and future accruals [because of] funding pressure from falling interest rates and market volatility”, said Moynihan.
Nevertheless, Irish Life anticipates that the hole would be filled by the availability of deferred annuities – policies that behave like DBs through core benefits such as choice of retirement date, a lump sum at retirement, a surrender option and death benefits.
“We expect the availability of a full risk transfer solution to drive an increase in market activity, as deferred annuities become available in the Irish market,” said Moynihan.
