Earlier this month, Brookfield, under its Brookfield Wealth division, announced that it was entering the UK’s pension risk transfer (PRT) market, having gone through the approval process carried out by the Prudential Regulation Authority and the Financial Conduct Authority.
The news brings the number of participating life insurers in the market to 11, three of which – including Brookfield – have entered in the past seven months: Royal London announced its official entry in September last year, and Utmost did so in early January this year.
That there is clearly an opportunity in the market for new entrants should not be a surprise. The Pensions Regulator’s Purple Book 2024, published in December last year, and something akin to a bible in the UK defined benefit pension industry, says that there were 4,974 DB pension schemes in the eligible universe in March last year. With the number of transactions in the market each year numbering around 150-200, at the current pace, there are more than two decades of de-risking activity remaining – a long time in financial markets.
While the likelihood of there being a glut of new entrants is low, for those that can and do, the coming years will provide plenty in terms of the supply of schemes hitting the market.
“There are high barriers to entry given the requirement to obtain regulatory authorisation and set up the necessary infrastructure required to price, contract and administer bulk annuity policies,” said Chris Rice, Head of Trustee Services at consultants Broadstone.
“If this hurdle can be overcome, the market is attractive to any new entrant considering joining. As well as the schemes already advanced with their considerations of, and preparations for, insurance, the regulatory regime around defined benefit schemes is pushing those that are not yet there towards insurance over the next 5-10 years. While some schemes may continue indefinitely, for the vast majority it is when, not if, a bulk annuity policy will be purchased.”
There is another potential headwind facing any other insurers looking to get a slice of the UK PRT pie.
A consistent barrier to growth parroted by market participants relates to the lack of human capital bandwidth that firms active in the space have. Much of the coverage of this issue tends to focus on the insurers themselves – after all, they are the ones that have to analyse the data provided by the pension schemes before they can come up with a price.
New entrants will need to hire people to do the work. They can do that by poaching from rival firms, of course, but this is something of a zero-sum game for the market overall as the other insurers will then need to fill those vacant positions.
But they can’t control other firms in the market, who are also feeling the squeeze. While training is helping, a drastic increase in the number of transactions completed each year is unlikely.
“It is not just at insurers where there are potential constraints on human capital. It is also the pension consultants, lawyers and administrators looking after and transferring the schemes. The work involved is actuarial, legal and investment advice along with data cleansing and member service, not all of which can be solved by increased technology. Insurers, lawyers, consultants and administrators are responding by scaling up recruitment and training to meet the demand and this has supported growth in the market over the last few years. Following a similar approach can support steady growth at existing and new insurers but it would not be possible to suddenly and significantly increase deal volumes, however,” said Rice.
There have been developments in the market, particularly at the smaller end, where ‘off the shelf’ solutions have gained traction, and this is also helping to absorb demand, but the gains in this area are set to happen after the ink dries on the initial contract.
“Up to now, a lot of the focus on efficiency has been based on pricing and we expect that to move to the post sale process, i.e., data cleansing and transfer of administration to the insurer. There is room for innovation and technology to play a greater role here,” said Rice.
Whether the remainder of 2025 sees more insurers enter the UK market remains to be seen. But even if any do, the Brits have a way to go before they can compete with the US, which has approximately 20 insurers all vying for business.
One notable difference between the two, however, is the segmentation of the insurance market stateside. That market has evolved to a point where certain insurers play mostly – exclusively, in some cases – in the larger end of the market. The same goes for the smaller end, and the middle.
Whether the UK market follows a similar path remains to be seen. But Rice does say that, in the short-term, the smaller scheme cohort will be where the activity is.
“A segmentation based on size of scheme is natural given the different characteristics of larger deals compared to smaller ones,” he said.
“Nevertheless, it is the larger schemes that have more flexibility to consider continuing as they are for longer, and the smaller schemes that are being pushed to insurance by the regulatory regime and where the largest number of schemes are. We therefore expect the smaller end of the market to become more competitive over time. While new entrants need to complete a handful of decent sized deals to gain assets under management and efficiencies in process, we are starting to see insurers look at deals below their previous minima.”
So, with off the shelf solutions gaining traction, certain insurers doing smaller deals than before, and the need for new insurers to build a book of business, it does indeed appear that the smaller end of the market seems to be where it is all happening which, in turn, means that any other insurers looking to enter the market face a tough competitive field.
“While all schemes are receiving quotes if they are patient, there is a building pipeline of schemes looking to approach the market that can support growth in capacity,” said Rice.
“It remains to be seen just yet the extent to which the new entrants will quote at volume, if all current participants ramp up quotations and transactions it may become less likely a new entrant will find it as easy to build market share.”
