The Future of Risk Transfer: What Trustees and Sponsors Need to Know

FOR PROFESSIONAL INVESTORS ONLY

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The risk transfer market continues to evolve rapidly, shaped by insurer dynamics, regulatory intervention, macroeconomic conditions and a growing suite of alternative endgame solutions. For UK trustees and scheme sponsors, keeping abreast of these changes is essential to securing member benefits effectively and efficiently.

This article summarises the key trends shaping the current risk transfer market and their practical implications for schemes, drawing on insights from "The Future of Risk Transfer: Emerging Trends and Innovations in the Marketplace," part of Gallagher's Risk Transfer webinar series "Bulk Purchase Annuities: Be Informed."

Insurer competition: A mature market, but not a static one

While the number of active insurers peaked at 11 in 2024, the market is now entering a period of consolidation. Recent acquisitions — such as Apollo's purchase of PIC and JAB Insurance's capture of Utmost — illustrate the increasing role of global investment firms and the continuing flow of capital into the bulk annuity sector.

What does this mean for schemes?

• Competition remains healthy. Despite consolidation, the market still has a strong bench of insurers, many with deep capital pools and growing appetite. This is particularly beneficial for mid-sized and smaller schemes, which in recent years have seen improved access to pricing.
• Administration quality is becoming a differentiator. Trustees often worry about what happens if their chosen insurer is later acquired. Importantly, member security is unlikely to be affected - insurers are well capitalised and heavily regulated. The greater risk lies in the member experience, particularly given the industry‑wide administration capacity challenges. Fortunately, insurers are investing heavily in digital platforms and automation, which should lift standards across the market.
• New entrants are unlikely. The barriers to entry remain high. Even life insurers considering a pivot into bulk annuities would face the same regulatory and operational hurdles as new players.

In summary, trustees should remain focused on insurer quality and administration capability as issues in these areas have a much higher likelihood of occurrence than the risks of future consolidation undermining member security.

Regulation: Greater scrutiny, greater transparency

Two regulatory themes are shaping the market: the PRA's life insurance stress tests and the continuing scrutiny of funded reinsurance.

PRA stress tests: Reassuring results

The first industry‑wide stress test generated significant interest. While adverse scenarios naturally reduced solvency levels, all insurers remained robust even under severe shocks to credit, property and reinsurance markets.

Implications for schemes:

• The PRA stress test results reinforce confidence in the sector.
• Stress testing is likely here to stay, giving trustees greater transparency into insurer resilience.
• Changes in capital requirements remain possible but are yet to be confirmed.

Funded reinsurance: A shrinking tool?

Funded reinsurance has supported recent pricing competitiveness by allowing insurers to share risk with overseas reinsurers. However, scrutiny is intensifying, driven by concerns about collateral, counterparty exposure and the level of capital insurers must hold. This increased scrutiny has three possible consequences:

1. Some insurers may step back from funded reinsurance because of the administrative and regulatory burden
2. New reinsurers may think twice about entering the market
3. Asset manager owned insurers may prefer to manage credit risks internally, reducing reliance on reinsurance

In summary, trustees should understand that funded reinsurance usage varies by insurer and may influence both pricing and the overall economic impact of their decision.

Matching Adjustment Reform: Nudging Towards Productive Finance

The government's desire for insurers to support UK productive investment has driven reforms to the Matching Adjustment (MA). The MA allows insurers to reduce the value of the liabilities they insure and therefore improves their capital positions. Two new features in particular could alter insurers' investment strategies:

• Highly predictable asset bucket: Allows certain assets without fully fixed cashflows to qualify for MA
• Investment accelerator: Enables insurers to invest early in assets expected to become MA eligible

However, these new features are still in early stages, and their practical impacts are not yet clear.

In summary, trustees should expect continued evolution of the MA, but the impact on pricing and capacity will take time to filter through.

Pricing trends: Competition and creativity drive value

One of the most common trustee questions is: Is now the right time to transact? Across 2024-2025, pricing fell by about 20% for many schemes. Several forces are behind this:

• Reduced mega-deals freed up insurer capacity, intensifying competition for smaller transactions.
• A shift towards gilts driven by attractive yields and tighter credit spreads — reducing the capital insurers needed to hold, passing savings to schemes.
• Innovative approaches, such as leveraged gilts, boosted insurer spreads and improved pricing.

While leveraged gilt opportunities may diminish as capacity tightens, competitive pricing is expected to persist into at least the first half of 2026.

In summary, pricing is attractive — but dynamic. Trustees should maintain regular engagement with the market and ensure their advisers actively monitor macroeconomic and supply / demand drivers.

Alternative endgame options: A rapidly expanding menu

Risk transfer no longer means buy-in and buy-out alone. Schemes now have credible alternative pathways:

Run-on strategies

Changes enabling surplus extraction are transforming the conversation. A well-designed run-on can:

• Take controlled investment risk to generate surplus
• Provide benefit uplifts for members
• Return value to sponsors and/or fund an additional DC arrangement.