The UK pension risk transfer market is set for another active year in 2025, driven by continued demand from pension schemes seeking to de-risk and a robust capital position among insurers.
According to analysts at UBS Global Research, the landscape is evolving with new entrants, increased regulatory clarity, and shifting asset allocation preferences.
The PRT market is seeing significant change with the arrival of new insurers. Royal London and Utmost are now active, and Brookfields will enter in 2025. These new entrants will likely start with smaller deals and then expand.
Additionally, new superfunds are entering the space, with Clara already completing £1.4 billion in transactions.
These developments indicate a growing diversity in solutions available to pension schemes, and the UK government is reportedly considering a public sector consolidator to further enhance market options.
Despite the emergence of alternative strategies, UBS analysts note that most pension schemes still prefer an insurance-based PRT approach rather than a run-on model, where schemes continue to manage liabilities independently.
Large schemes are more likely to consider the run-on approach, but industry sentiment remains firmly in favor of transferring risk to insurers.
Capital constraints are not expected to be a limiting factor for the market. UBS estimates suggest that current surpluses are sufficient to fund over £500 billion in risk transfers, supporting a decade of annual transaction volumes around £50 billion.
However, administrative capacity poses a challenge, particularly for schemes transitioning from buy-in to full buy-out, as members become direct policyholders of insurers. Client servicing has thus become a crucial consideration in selecting an insurance partner.
On the asset side, insurers are increasingly looking for gilts as payment for PRT transactions. UBS highlights a shift in preferences due to tight credit spreads, with Legal & General (LON:LGEN) (L&G) in particular signaling reduced interest in credit investments on a pricing basis.
Smaller pension schemes are also benefiting from improved market efficiencies. Insurers such as Aviva (LON:AV), L&G, Just, and PIC have streamlined their quotation processes for smaller transactions, allowing a greater number of schemes to engage in de-risking solutions with more ease.
Regulatory developments remain a key factor shaping the market. With Solvency UK largely implemented, attention is now turning to the regulation of Funded Re transactions, particularly in managing recapture risk.
The Prudential (LON:PRU) Regulation Authority (PRA) is maintaining scrutiny over these structures as they become more prevalent in the insurance sector.
Longevity risk continues to be a focal point for insurers. UBS analysts highlight potential stress scenarios linked to advances in medical treatments, such as Senolytics drugs, which could extend life expectancy by up to 10 years.
UK insurers typically reinsure more than 90% of their new longevity risk, but the back book remains only about 50% reinsured, leaving some exposure to future longevity shocks. UBS does not anticipate continued longevity releases given these uncertainties.
