UK Chancellor of the Exchequer Rachel Reeves’ announcement at the end of January that she wants to unshackle billions of pounds locked in defined benefit (DB) pension fund surpluses has raised questions about how such a move might impact the country’s bulk purchase annuity market. Reeves told a meeting of City chiefs that by releasing the money “trapped” in DB pensions, employers could allocate it to potentially more lucrative strategies outside of their scheme investment remits.
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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