UK life sector outlook set apart by growth in pension risk transfers

Written by Adam Cadle

03/01/2024

The UK life insurance sector is the only sector in Europe with an improving outlook for 2024, Fitch Ratings has said, due to the prospect of “strong profitable growth in pension risk transfers”.

Higher interest rates have boosted pension scheme funding levels, making it easier for corporates to offload their pension liabilities to insurers. Elsewhere in Europe, 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.

Fitch expects UK pension de-risking volumes in 2023 and 2024 to exceed the previous record in 2019, spurred by much better affordability for transferring risk following the steep interest rate rises in 2022-2023, although volumes “may be lumpy from one year to the next given the large size of some deals”.

“Pension superfunds could encroach on the UK life market for pension risk transfers but we expect the near-term impact to be small relative to the expansion of the market,” it added.

Fitch also expects the individual annuity market to grow in 2024, driven by retirees attracted by annuity rates that have risen largely in step with bond yields. “Inflows into insurers’ workplace retirement savings schemes will increase due to salary inflation and fiscal incentives, although pressure on households’ disposable income will dampen the impact,” it said.

“The sector’s exposure to illiquid assets will grow in 2024, driven by more favourable treatment under proposed changes to Solvency II and demand for such assets to back annuity liabilities. However, we expect exposure among rated UK life insurers to remain modest. In contrast to some privately owned life insurers in the US, life insurers in the UK should not face significant liquidity risk from their holdings of illiquid assets given the illiquid nature of UK annuity liabilities.”

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