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At a stakeholders’ meeting on 11 September 2023, held at the Royal College of Surgeons, Mitul Magudia, PIC’s Deputy Chief Origination Officer, gave an overview of how pension risk transfer market has evolved over the last few years, and where we see it heading:
“In bringing everyone here today, we’d like to harness the potential that lies within the exchange of ideas and experiences. This evening represents a convergence of expertise and perspectives, to tackle the challenges and opportunities that shape what was once a small part of the pensions market but is now very much the mainstream. PIC and other insurers will be playing an increasingly important role in providing financial security to millions of annuity policyholders and as investors in the UK real economy.
“The theme of this year's update is in line with the principle of going mainstream and how the market will operate. And this update could not be more timely or relevant. It has been a period of rapid change, driven by increasing demand, a fundamental shift in market conditions, political interest, and legislative change. In a world additionally marked by rapid technological advancements, shifting geopolitics and the impact of climate change, we are entering into a new phase for the bulk annuity market.
“The emphasis of the event is for everyone to catch up with colleagues and peers. However, we’ll spend around an hour with some insight and discussion prior to the drinks’ reception. Following my introductory comments on the state of the current market, we’ll be moving on to a panel discussion with four of PIC’s Executive Committee members covering the increase in demand in the bulk annuity market and the four potential constraints: capital, reinsurance, assets, and people. Each of our executive members is an expert in each one these areas so we should be able to generate some interesting discussion.
“We’re particularly pleased to have the recently renovated Royal College of Surgeons headquarters in Lincoln’s Inn Fields as our venue this afternoon. The Royal College of Surgeons has made a home in Lincon’s Inn Fields since the late 1790s. Fast forward, two hundred years, and in 2020, PIC invested £40 million in debt issued by the Royal College of Surgeons to finance the final stages of the redevelopment of its flagship headquarters. The grade II listed Barry Building has been redeveloped to create a fit-for-purpose, state-of-the-art building for training the next generation of surgeons and highly informative bulk annuity updates.
"We may be about to see changes to the pensions regulatory regime following a number of consultations on a wide variety of topics."
“Several items mentioned here will inevitably be raised as part of our panel discussion, but I will set the scene for a more detailed discussion in a few areas, firstly the rise in interest rates and its direct and indirect ramifications. Secondly, Solvency II reform and our current expectations. Thirdly, we’ll touch upon the Mansion House reforms and PIC’s view. And lastly, we’ll talk about some categories of schemes themselves – namely the largest schemes and the smallest ones.
“No update on the bulk annuity market would be complete without consideration of the change in UK interest rates which have risen from 0.1% in December 2021 to 5.25% in August 2023. The long-term impact of rising interest rates is an unfolding situation, but should it become the new normal, this will have a lasting impact on the bulk annuity market.
“There seems to be a few likely consequences:
“Whilst these are natural consequences of increased surpluses, we are also seeing interesting discussions arise in respect of the best use of the funding position.
“As well as changes to market conditions, we also have changes to the insurance regulatory environment to consider. The PRA published a consultation paper in June 2023 on the topics of internal models, capital add-ons, transitional measures and regulatory reporting. We expect a second consultation document later this month primarily on the Matching Adjustment.
“Final policy is expected in Q1 2024 with MA reforms taking effect from half year in 2024, with the vast majority of remaining reforms taking effect at end 2024.
“In addition to changes in the insurance regulatory regimes, we may be about to see changes to the pensions regulatory regime following a number of consultations on a wide variety of topics.
“As would be expected, some of the largest schemes in the UK are also some of the best funded and as a result, they like many others have held discussions on what their endgame strategy could be and whether this should include insurance.
“From PIC’s perspective, we are interested in considering the largest transactions as demonstrated by our transaction earlier this year with the RSA schemes. We will continue to consider each opportunity on a case-by-case basis but expect that the transaction record set by the RSA deals will be broken.
“Aside from the assets, capital and reinsurance required for very large transactions, we note that the resources are significant particularly where residual risk is a feature of the transaction. And the PRA is clearly keeping a close eye on how insurers manage large transactions.
“Small schemes have also recently featured in the public discourse and their perceived lack of capacity from insurers. We note that many small schemes are still able to insure, and that insurers and advisors are working together to continue to find ways to streamline processes and innovate in this area. PIC are also considering whether this a space of the market in which we would like to participate more actively.
“There seem to be natural controls on the speed with which the market can grow, and these natural controls are likely to suit all parties:
“These factors and associated resource requirements will naturally control the pace of growth of the market and help to achieve the long-term sustainability that everyone is keen to see.”
For further information please contact:
PIC
Clive Booth
+44 (0) 7780 599247
boothc@pensioncorporation.com
Apella Advisors
Arne Wysny
+44 (0) 7818 497469
PIC@apellaadvisors.com
About PIC
The purpose of PIC is to pay the pensions of its current and future policyholders. PIC provides secure retirement incomes through comprehensive risk management and excellence in asset and liability management, as well as exceptional customer service. At year end 2022, PIC had insured 302,200 pension scheme members and had £41 billion in financial investments, accumulated through the provision of tailored pension insurance buyouts and buy-ins to the trustees and sponsors of UK defined benefit pension schemes. To date, PIC has made total pension payments of £10.6 billion to its policyholders. Clients include FTSE 100 companies, multinationals and the public sector. PIC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority (FRN 454345). For further information please visit www.pensioncorporation.com
