10 predictions for the risk transfer market in 2025

2 January 2025

1. Another record-breaking year

At the time of writing, it looks like 2024 was a record year for scheme transactions. 2024 was also the first year in which one insurer completed more than 100 transactions – unthinkable only five years ago.

Looking forward, we’ll almost certainly see more records broken in the risk transfer market in 2025. The question is, which ones?

There’s no guarantee that the total volume of transactions record will be broken in 2025. This is because that particular metric is mainly driven by the timing of a small number of very large deals. One mega transaction can have an undue influence over the year’s statistics.

2. More of the same

Record-breaking numbers aside, we can expect more or less the same from a frenetic risk transfer market. Some commentators may be predicting a bit less activity in 2025, but nobody really expects a significant drop. If we look at our pipeline, there are many schemes at the preparation stage, all set to transact in 2025.

3. Buoyant smaller scheme activity

At First Actuarial, we make no secret that the focus of our risk transfer team is on schemes up to £100m in size. And we’re happy to report that the smaller scheme market is in the best shape we’ve seen for some time.

With our growing risk transfer team, we’ve completed more transactions than in any other year. Along the way, we’ve spotted signs of ongoing healthy market conditions for smaller schemes:

• We arranged competitive processes for a number of schemes which would have required an upfront exclusivity agreement only 12 months ago
• We engaged with an insurer which typically only quotes for schemes at least ten times larger than the one we’re working with
• We saw increased flexibility in price negotiations to ‘get deals over the line’ – even with the smallest schemes.

4. More market entrants

With new insurers Royal London and Utmost appearing in 2024 (hot on the heels of M&G in 2023), the bulk annuity market is larger than ever. It will be interesting to see whether these newer players can scale up their capacity to quote on a greater number of deals in 2025.

We expect to see even more market entrants in 2025. A few months ago, for example, Brookfield, a large Canadian financial services giant, applied to the FCA for approval to trade in the UK insurance market.

The question of which scheme sizes these newer players will target is a big unknown. For Utmost, only one deal has been announced to date for a £20m scheme, and we expect future deals to be larger. Royal London has completed transactions between £30m and £350m (although the larger transactions were for internal schemes).

Meanwhile, established insurers such as Aviva and Just continue to quote on very small deals, and an increasing number of insurers are looking at sub-£100m transactions. With that in mind, some insurers may be forced to target larger deals that are predominantly the domain of other insurers. In turn, those insurers may push for even larger deals.

5. Innovation

I’m looking forward to more innovation in 2025. Several insurers now have streamlined quotation templates in place. During 2024, significant refinements to these templates paved the way for increased transaction volumes and more accurate benefit modelling. I discuss these templates in more detail later in this article.

Alternatives to traditional risk transfer mechanisms are also gaining traction. One example is M&G’s recently announced Value Share BPA proposition, which shares financial risk and reward with corporate sponsors.

6. More alternatives to buy-out

a. Consolidators

As we’ve all seen, there’s been a great deal of buy-out activity in recent years. But alternatives are now clearly in focus.

We see Clara, the only approved Defined Benefit consolidator, writing more deals for schemes that can’t afford to buy-out. As a sectionalised scheme with funds overseen by a single governance committee, Clara is slightly cheaper than a buy-out. Clara runs schemes on until buy-out with an insurer becomes affordable.

The question for 2025 is how many more deals Clara will take on, and whether it will face competition from new consolidators entering the market.

b. A possible government consolidator

The previous Government committed to establishing a government consolidator via the PPF, to look after schemes that are unattractive to commercial providers. 2025 will hopefully provide clarity on whether the new Government plans to proceed with this development, which was originally due to be in place by 2026.

c. Scheme run-on

2024 was the year in which scheme run-on became an industry talking point, prompted by improved funding levels and reduced sponsor dependency.

Scheme run-on can mean running on indefinitely or running on for a period until a bulk annuity transaction becomes more attractive.

We fully expect more schemes to consider run-on this year. My colleague Steve Deverell-Smith is just one of a number of people arguing that “run-on can and will work for schemes of all sizes”. Read his recent blog post – Defined Benefit scheme run-on – For the few or the many?

7. Continued administration capacity constraints

It’s no secret that the industry is stretched on both the insurer and scheme administration fronts.

Scheme administration is the biggest pinch point in the risk transfer process. Administrators face the double whammy of business-as-usual requirements on top of project work, notably the Pensions Dashboards Programme, which will intensify in 2025.

This is slowing down buy-out transactions. Scheme administrators must always put their members first. But regulatory pressures around pensions dashboards and other initiatives are equally pressing.

On the insurer side, there simply aren’t enough people to do the work. We see a great deal of staff movement between the various players, and the lack of continuity could slow down the number of transactions completed.

8. Ongoing difficulties with non-standard quotation templates

One of the most common challenges we encounter in risk transfer projects is the completion of streamlined quotation templates. Four of the insurers in the risk transfer market use these templates as part of their respective quotation processes.

While these are broadly beneficial, the lack of standardisation across insurers means that schemes often have to populate multiple templates which each have differing data requirements. The additional quotation costs have a disproportionate impact on smaller schemes.

What we really need is a collaborative exercise across all insurers in the market to standardise the data formatting.

9. Earlier GMP equalisation

On to everyone’s favourite subject – GMP equalisation. As I’ve described, administrators are heroically juggling business-as-usual work with time-consuming projects, and GMP equalisation features prominently in that mix.

Many schemes enter the buy-in process with unequalised benefits, and deal with GMP equalisation at the data cleaning stage. Earlier equalisation is tricky without changes to the streamlined quotation templates.

But trustees and sponsors have much to gain from earlier GMP equalisation. It would improve certainty around the cost of the transaction. Even more importantly, it would foster more orderly transitions.

Currently, buy-ins and GMP equalisation are often implemented at a similar time. This can be confusing for members. Earlier scheduling, enabled by equalisation-friendly quotation templates, would free administrators up to implement GMP equalisation and then support the transaction without distraction. This has to be a welcome development for an over-stretched industry.

Encouragingly, some insurers have indicated that they’re looking into this. Let’s hope we can get it sorted in 2025.

10. No end to the hype and celebrations!

It can get a bit wearing, can’t it? Every time a buy-in is completed, there seems to be a rush to LinkedIn to put the word out. And the industry press seems to have an insatiable appetite for risk transfer stories.

But really, why not continue to celebrate our successes into 2025? If we’ve given members more financial security in retirement – and delivered unexpected upsides in some cases, like enhanced benefits from scheme surpluses and members rescued from the PPF – that has to be worth celebrating.