The report titled “Global Pension Risk Transfer Market Outlook” by Milliman, dated November 3, 2023, provides a comprehensive analysis of the Pension Risk Transfer (PRT) markets, focusing on key territories such as the United Kingdom, the United States, the Netherlands, and Ireland.

The report outlines the global landscape of Defined Benefit (DB) pension schemes and their interaction with the PRT market. It emphasizes the importance of stakeholders understanding the environment in which insurers operate and the challenges they face.

Key Findings and Data

United Kingdom: PRT Market Analysis

• Market Dynamics: The UK’s PRT market is mature and thriving, with nine insurers actively participating. The first half of 2023 saw over £20 billion in premiums, marking it as a historically strong period.
• Demand Drivers: Increased demand is attributed to rising interest rates and improved funding positions of pension schemes. This encourages schemes to de-risk, with 43% of schemes targeting a buyout.
• Challenges: The industry faces challenges like illiquid assets, operational constraints, and the uncertain impact of COVID-19 on longevity assumptions.
• Regulatory Considerations: The report discusses Solvency UK, risk margins, matching adjustments, and the regulatory focus on the PRT market.

United States: PRT Market Analysis

Market Growth

• Record High Premium Transactions: In 2022, the United States Pension Risk Transfer (PRT) market witnessed a landmark growth, with premium transactions reaching an unprecedented $51.9 billion. This figure not only signifies a substantial increase over previous years but also sets a new record in the history of the U.S. PRT market.

Demand Factors

1. Interest Rate Impact: The escalation in interest rates played a pivotal role in propelling the demand for PRT. This increase has positively impacted the funded status of pension schemes, making them more financially robust and encouraging plan sponsors to consider risk transfer options.
2. Funding Status Improvement: Enhanced funding positions of pension schemes, largely due to rising interest rates, have catalyzed a surge in demand for PRT solutions. This improved financial health has given plan sponsors the confidence and capacity to pursue risk transfer strategies.

Risk Transfer Models

1. Buyouts Dominance: Buyouts, also known as liftouts, have emerged as the most prevalent form of PRT transactions in the United States. These involve using plan assets to purchase a group annuity for a specific group of participants, typically those already in receipt of pension payments. In 2022, buyouts constituted a staggering 93% of all PRT transactions by premium, underscoring their popularity in the American market.
2. Lump-Sum Windows: This model offers a one-time opportunity to participants (usually terminated employees with deferred benefits) to receive their pension in a single lump-sum payment. It’s a strategy often employed for its simplicity and efficiency in reducing pension liabilities.
3. Buy-Ins and Their Rarity: Buy-ins involve purchasing a contract where the insurer reimburses the plan for payments to covered participants. Despite their benefits, they are less common in the U.S. market compared to buyouts, primarily because they do not offer the same level of administrative cost and PBGC premium savings.
4. Limited Use of Other Structures: Other risk transfer structures like longevity swaps have seen limited uptake in the U.S., indicating a market preference for more straightforward transaction models like buyouts and lump-sum windows.

Netherlands and Ireland: PRT Market Analysis

Netherlands

1. Market Landscape:
   • The Dutch PRT market operates similarly to the UK with some unique regulations and specificities.
   • The introduction of the new Pensions Act in July 2023 is a significant change, influencing pension schemes to consider PRT transactions.
2. Market Activity:
   • Limited activity in recent years with only a few key players.
   • Total transaction volume for buyouts in 2022 was just €55 million, likely influenced by the anticipation of the new pension law.
3. Pension Schemes:
   • Predominantly defined benefit (DB) schemes, transitioning to defined contribution (DC) schemes.
   • High participation in employer-based pension schemes (about 90% of the working-age population).
4. PRT Transactions:
   • Focus on buyouts or partial buyouts, where a portion of the scheme is transferred to an insurance company.
5. Driving Factors:
   • The new Pensions Act potentially transforming DB benefits into DC capital.
   • Increased interest rates improving funding ratios.
6. Insurer Incentives:
   • Writing PRT business is appealing due to the margin potential and increasing life book.
7. Challenges:
   • Resource constraints (capital and personnel).
   • Need for technological investment.

Ireland: PRT Market Analysis

1. Market Overview:
   • The PRT market in Ireland is less mature and smaller in scale compared to the UK.
   • Focus historically on managing investment risk and enhanced transfer value exercises for deferred pensioners.
2. Market Scale:
   • The DB market and consequently the PRT market are significantly smaller than the UK.
   • Bulk annuity premium volumes show considerable volatility due to the small market size.
3. Demand Drivers:
   • Improved funding positions and rising interest rates.
   • Buy-in transactions are increasingly popular, especially among larger schemes.
4. Insurer Participation:
   • Limited number of active insurers in the PRT market.
   • Bulk annuities are not a primary line of business for most insurers.
5. Challenges:
   • The scale and maturity of the market.
   • Limited options for inflation-linked benefits.
   • COVID-related uncertainties in mortality rates and insurer risk appetites.
6. Regulatory Considerations:
   • Central Bank of Ireland and Pensions Authority oversee the market.
   • Solvency II reforms may impact capital requirements for annuity writers.

Lessons Learned

1. Netherlands:
   • Anticipated increase in demand due to the new Pensions Act.
   • Efficiency in quoting processes and understanding of internal rate of return.
   • Challenges in expanding market activities due to new regulations and potential for increased demand.
2. Ireland:
   • Increasing demand for buyout and buy-in solutions.
   • Challenges in market scale and insurer participation.
   • Potential for more insurers to enter the market due to growing demand.

Operational Efficiency in UK PRT Insurers

1. Streamlined Operating Models: Many UK PRT insurers have developed efficient operating models over several years. These models are characterized by a clear division between in-house functions and outsourced activities. Key functions like deal origination, pricing, longevity expertise, hedging, and asset origination are often handled in-house. Investment management, for example, might be carried out by a group company specializing in this area.
2. Outsourcing Practices: Functions where insurers do not need internal expertise are outsourced for cost-effectiveness and efficiency. Commonly outsourced functions include pension scheme administration and third-party asset origination for specialized asset classes.
3. Modeling Efficiency for Pricing and Reporting: Efficient modeling for pricing and reporting is a critical success factor. UK PRT insurers aim for streamlined and automated pricing processes to handle large datasets provided by pension schemes without excessive run times and ensure smooth onboarding of new schemes onto reporting systems.
4. Use of Technology: The use of advanced systems like Milliman’s Integrate system is highlighted, which provides a streamlined end-to-end pricing and reporting process with robust built-in checks and fast run times.

Regulatory Mechanisms

1. Solvency-related Regulatory Mechanisms: UK insurers efficiently utilize regulatory mechanisms related to solvency. Established PRT insurers typically have approval to use the Matching Adjustment (MA) and a full or partial internal model for calculating their Solvency Capital Requirement (SCR). This allows for high capital efficiency.
2. Reinsurance Strategies: Insurers often use reinsurance as part of their capital strategy, providing more capacity to write further business and benefiting from reinsurers’ asset management capabilities. This also includes exposure to jurisdictions with lower capital requirements.
3. Risk Margin Adjustments: Proposals for changes in the method of calculating the risk margin, which is part of an insurer’s liabilities under Solvency II, are noted. The UK government has indicated that these changes could significantly reduce the risk margin for long-term life insurers.
4. Matching Adjustment Reforms: Changes to the MA are proposed, including increasing its risk sensitivity and widening the range of eligible assets used in the MA portfolio. These reforms aim to allow insurers to invest in higher-yield assets, potentially benefiting pension schemes through more favorable pricing.
5. Productive Investments and ESG Focus: There’s an increased political focus on how insurers invest in illiquid assets, particularly in infrastructure lending and regeneration projects, with a strong emphasis on ESG (Environmental, Social, Governance) factors.
6. Regulatory Engagement and Compliance: UK PRT insurers are actively engaged in complying with regulatory changes and adapting their strategies accordingly. The PRA (Prudential Regulation Authority) is expected to implement new supervisory measures to maintain safety and soundness in the industry.

The Milliman report on the Global Pension Risk Transfer market reveals a dynamic and evolving landscape. In the UK, a mature market thrives with efficient operational models and regulatory adaptability. The US market is marked by significant growth, predominantly through buyout transactions, driven by favorable economic conditions.

The Netherlands and Ireland, while smaller in scale, are adapting to new regulations and showing potential for increased PRT activity.

Overall, the PRT sector is experiencing robust growth and transformation, reflecting a diverse range of market dynamics, regulatory environments, and demand drivers across different regions.