Overseeing BPA Growth Safely

This article is an abridged and edited version of the original, which can be found at https://www.bankofengland.co.uk/speech/2025/april/gareth-truran-speech-at-the-22nd-conference-on-bulk-annuities 

Over the last year we have continued to see growth in bulk purchase annuity (BPA) transaction volumes, given high demand for corporate defined benefit scheme risk transfer. Notably, there have been a larger number of smaller transactions, while new entrants have helped provide additional capacity. So it’s not surprising that market forecasts anticipate that the number of buy-in transactions might exceed 300 for the first time this year, and that the combined annual value of buy-ins and buy-outs might now exceed £60bn by 2027¹. 

There has been considerable focus in recent months on how pension scheme capital and investment can best be deployed to support pension scheme members, employers and the UK economy. This article focuses on the BPA transfers into the insurance sector given the PRA’s role. 

It’s important to note that a transfer of business from a pension scheme to an insurer does not in itself change the aggregate level of long-term investment available to the economy – the pension promises and the assets backing them just move from one part of the financial sector to another.  

Maintaining resilience 

Our job is to make sure that insurers taking on these liabilities remain safe and sound, with policyholders protected, and that the sector can continue to fulfil its critical economic functions of providing retirement income to policyholders and long-term investment throughout the cycle. As part of that, it is important that the sector can safely absorb the high projected volumes of new BPA business. 

The BPA market has continued to be very competitive over the last year. Demand from sponsors has remained high, as schemes’ funding positions have improved on the back of higher interest rates. Tight credit spreads have affected insurers’ asset allocation strategies. We have seen changes in terms and conditions and the introduction of new product features that can pose different risks. Increased demand has stimulated supply through new entrants and additional capital. Insurers’ operational and risk management approaches, and asset origination capabilities, have needed to adapt to these changes. 

Against this backdrop, we have been alert to the risk that structures and features emerge that may pose safety and soundness risks if they are not managed effectively. Two examples of our supervisory focus on such issues have been our work on solvency triggered termination rights, and funded reinsurance. And as the broader global risk outlook changes, it will be important for insurers to think about the implications for credit conditions and their investment portfolios. 

Solvency triggered termination rights 

Solvency triggered termination rights are an increasing feature of the BPA buy-in market. They provide pension schemes with the option to terminate a buy-in arrangement when an insurer’s solvency position has breached a pre-defined threshold such as 100% of its Solvency Capital Requirement (SCR). The terms of these options vary, and we have been considering their implications for insurers. 

These rights have the potential to impact the sensitivities of an insurer’s balance sheet under stress. For example, in some cases a pension scheme’s recapture of annuities could improve the insurer’s solvency position if assets backing the SCR are retained. 

However, they can also introduce new risk management challenges. For example, if a termination payment could be required from an insurer to the pension scheme at short notice or with constraints on the assets which can be included, this could expose the insurer to liquidity risk. If a termination payment affected a high proportion of an insurer’s underlying annuity asset portfolio, this could also generate asset concentration risk depending on the make-up of its residual portfolio. 

To mitigate these potential risks, we expect insurers to consider carefully the potential issues for their portfolios which might arise in risk managing these exposures in a stress situation, and ensure they have mechanisms in place to address them. For example, firms should consider the options available to them such as retaining more contractual discretion over the composition or timing of any termination payments, ensuring liquidity risk appetites and asset concentration limits are calibrated to reflect the impact of these options under stress, and prudent exposure limits on the use of solvency triggered termination rights. 

Funded reinsurance 

The implications of continued growth of funded reinsurance transactions also remain high on our supervisory and policy agenda.² The PRA and Financial Policy Committee (FPC) have previously expressed concerns that sustained growth in funded reinsurance transactions could, if not properly controlled, lead to a rapid build-up of risks at a sector level.³ 

Funded reinsurance transactions are in many ways much closer in economic substance to collateralised loans to a reinsurer, bundled with a degree of longevity reinsurance. Moreover, these transactions often involve counterparties with business models more heavily focused on private asset origination rather than traditional reinsurance, with higher concentrations to illiquid investments which may have more correlated risk of default. 

Furthermore, commercial pressures on some insurers – for example to secure BPA contracts or reduce capital strain – may drive higher funded reinsurance volumes or weaken the terms in such transactions. For example, we have seen signs of some insurers lowering their collateral standards, increasing the risk that the collateral supporting these loans might not be adequate to cover long-term liabilities in a reinsurance recapture event.⁴ 

In July last year, we published policy expectations for those UK insurers active in funded reinsurance, covering risk management, the modelling of the SCR, and how firms should consider the structuring of these arrangements.⁵ Since then, our supervisors have been engaging with those individual life insurers who use funded reinsurance. We have sought to understand how effectively they have implemented these expectations and how firms’ appetites have been impacted. 

We have seen some positive signs of change including some insurers adopting more robust or formalised collateral policies and recapture plans. These are important controls. 

But as we noted in our 2025 Insurance Priorities letter, there are also areas where some firms are falling short.⁶ In particular, the limits which insurers have set to manage their funded reinsurance exposures are not always aligned with our expectations.⁷ It is also not clear that the frameworks firms have in place for managing their funded reinsurance adequately mitigate the potential for a build-up of systemic risk in aggregate. While our expectations were designed to set important baselines for prudent risk management practices, they have not so far appeared to materially alter the outlook for funded reinsurance volumes, nor do they appear to have prevented a trend towards weaker collateral standards. 

This work will remain a supervisory priority for us in 2025 and we will continue to consider whether further action is needed to address the risks in the light of our findings. 

We have also continued to engage internationally on the potential risks involved in funded reinsurance, and the growing interconnectedness between the life sector and the private equity and credit markets. The International Association of Insurance Supervisors (IAIS) has considered funded reinsurance growth in its most recent annual Global Insurance Market Report.⁸ I also welcome the recent publication of the IAIS’s draft issues paper on structural shifts in the life insurance sector including asset intensive reinsurance.⁹ The Bank for International Settlements and the International Monetary Fund have also recognised these emerging risks.¹⁰ 

It is important these broader global financial sector perspectives are considered because individual insurer risk management and controls only provide a certain level of protection – these wider vulnerabilities and interlinkages can only be properly assessed and mitigated at a system-wide level. 

Life Insurance Stress Test (LIST) 

The final safeguard is our new approach to stress testing, where for the first time we plan to increase transparency by publishing both sector-wide and firm-specific stress test results for the largest UK life insurers. 

The objectives of LIST 2025 are to assess sector-wide and individual firm resilience to severe but plausible events; to strengthen market understanding and discipline through individual firm publication and to improve insights into risk management vulnerabilities. The exercise has three parts: a core financial market stress, and two additional ‘exploratory’ scenarios – an asset concentration stress, and a funded reinsurance recapture scenario.¹¹ 

LIST 2025 will focus on the largest BPA writers as an important part of the life sector. In designing the firm-specific disclosures, we have consulted potential users including analysts, credit rating agencies, pension fund trustees and advisers to understand the information they would find helpful to understand insurer resilience. 

I want to emphasise that LIST is not a pass or fail exercise and the results will not be used by the PRA to set regulatory capital. The core financial markets stress represents one severe but plausible scenario. Although not calibrated to a specific historical financial event, the scenario takes into account previous market shocks from the past 20 years, including the worst year of the global financial crisis, and recent annual concurrent stress test scenarios for banks and building societies. 

We are also aware that exercises like this inevitably require some simplifications. For example, this first exercise will focus solely on the solvency positions of individual insurance legal entities, so will not cover any wider group factors. To help provide comparability between firms, we have also defined a specific set of management actions that firms can take credit for in the exercise. 

Given these simplifications, we recognise the importance of explaining clearly the scope and limitations of the exercise when we publish the results. We also recognise some firms might want to provide additional information alongside our results to provide context beyond the scope of the exercise. 

Let me say a bit more about our publication plans. 

We intend to publish the LIST 2025 results towards the end of the year. Given the exercise includes both sector-level results and some firm-specific components, we plan to split the publication into two stages. 

The first publication will include aggregate results, with sector-level commentary and aggregate disclosures covering all three parts of the exercise. This will also include some information to help explain how the MA works in the core financial market stress scenario. 

We then plan to supplement the sector publication a few days later with some firm-specific disclosures, showing the high-level composition of firms’ MA portfolios by asset class, and the impact of the core financial market stress scenario on their solvency positions in each stage of the stress. We will provide some brief narrative alongside these results and firms may publish additional information at that stage if they choose. For LIST 2025 there will be no firm-specific disclosures on the two exploratory scenarios. 

We will also take stock next year on the lessons we have learnt from LIST 2025 as we think about future exercises, which we have said we aim to complete every two years. I am grateful to all those who have helped us launch this exercise for the first time this year and look forward to continued engagement with stakeholders as we prepare for publication. 

Conclusion 

The BPA sector is competitive and continuing to grow fast. As it does so, the number of policyholders who rely on insurers to provide secure retirement income also increases. Ensuring the life insurance sector has the financial resilience to continue to meet those important long-term commitments to policyholders in good times and bad also becomes more important than ever. And as the sector’s investment capacity increases, it is important that the sector puts this capacity to work to meet these policyholder commitments and to help benefit the UK economy as much as possible. 

Gareth Truran is Executive Director, Insurance Supervision at the Bank of England’s Prudential Regulation Authority