A report published by Legal & General at the end of the first half of 2023 predicted the UK’s pension risk transfer (PRT) market was on course for one of its busiest years on record and activity has continued at a hectic pace since. On one day in November two transactions worth a combined $11bn were announced: a $6bn transfer from pharmacy chain Boots’ pension fund to Legal & General, and a $5bn bulk annuity deal between retailer Co-op and Rothesay Life. 

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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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