Partly fuelled by rising interest rates in 2022, Defined Benefit (DB) pension funds are increasingly looking to the pension risk transfer market to provide more certainty to the current and future pensioners who are members of their plan. But there are benefits to plan sponsors, too; pension liabilities can be a drag on company performance, so the option to essentially wind up the scheme is an attractive one.
Insurers are favouring funded re as it helps firms manage the market and longevity risks associated with writing bulk purchase annuity (BPA) business by reducing capital charges and therefore making PRT deals more competitive.
Unsurprisingly, given its growth and potential for capital optimisation, UK regulators have been carefully watching the increased use of funded re. In June 2023, the Prudential Regulatory Authority (PRA) sent a “Dear CRO’ letter to heads of risk at UK life insurers.
The letter outlined the regulator’s two main concerns from a sectoral review which it had carried out.
“One of the key risks arising in funded re is that firms recapture sub-optimal portfolios with depressed values and with limited ability to be transformed effectively to the firms’ preferred portfolio,” the PRA letter said.
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