Pension derisking improves UK life insurance sector outlook
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The UK is the only life insurance sector in Europe with an improving outlook for 2024 largely due to the prospect of strong profitable growth in pension risk transfers, according to Fitch Ratings.
Higher interest rates have boosted pension scheme funding levels, making it easier for corporates to offload their pension liabilities to insurers, the ratings agency explained.
It said: “We think the pension risk transfer market will continue its strong profitable growth in 2024, underpinned by strong structural demand from corporates derisking their balance sheets. The latter is supported by improved pension scheme funding levels, following the increases to interest rates over the past 18 months.”
Elsewhere in Europe, Fitch said the life sector outlooks are ‘neutral’, with the positives, such as higher investment returns, broadly in balance with the negatives, such as the muted macroeconomic backdrop.
Between 2018 and 2022, UK life insurers struck £155bn worth of buy-in and buyout deals. Legal & General was the largest provider of the business, dominating 25% of the market. Successful deals by L&G include a £1.1bn buy-in with the Maersk Retirement Benefit Scheme in 2020, a £760m buy-in with Sanofi in 2021, and two buy-ins with the British Steel Pension Scheme worth a combined £4.3bn in 2022. In 2023, L&G agreed a £4.8bn buy-in with the Boots Pension Scheme, a further £2.7bn buy-in with the British Steel Pension Scheme and a £1.8bn buy-in for two United Utilities schemes among others.
Rothesay came in second place with 20% of market share. Last month, the insurer completed a £2.7bn buy-in transaction with the Thales UK Pension Scheme, marking the firm’s 12th transaction in 2023.
Fitch expects annual pension derisking volumes in 2023 and 2024 to exceed the previous record in 2019 but warned that given the large size of some deals, market volumes “will remain lumpy from one year to the next”.
Rishikesh Sivakumar, an associate director at Fitch, said: “We expect the increased appetite from corporates to derisk their balance sheets as a result of improved pension scheme funding levels amid higher interest rates to support the strong profitable growth of the UK pension risk transfer market.’’
How do you think the market will perform in 2024?
