Pension risk transfer markets are expanding. The United States, United Kingdom, and Canada are experiencing unprecedented levels of PRT activity.
Record-breaking transaction volumes define this new era. An influx of new insurers and innovative deal structures are transforming the market. The PRT boom is touching every segment from multi-billion-dollar megadeals to mid-market transactions.
What is driving this explosive growth? How are insurers and plan sponsors navigating this new terrain? What does this mean for the future of pension management?
This analysis dives into the heart of the PRT boom. We will examine the forces propelling the markets in the US, UK, and Canada to new heights.
How is the US PRT Market Booming?
The US pension risk transfer market continues its remarkable growth trajectory, with 2024 building on the momentum of previous years. The first half of 2024 has already set new records, with 330 transactions totaling $25.7 billion in premium, up from 289 transactions and $22.4 billion in the same period of 2023.
This growth is part of a multi-year trend. In 2023, the market reached a staggering $45 billion in total transaction volume, following a record-breaking 2022 that saw $51.8 billion in premiums across 568 transactions. This consistent year-over-year growth underscores the market’s robust expansion.
The evolution of transaction sizes further illustrates this growth. The average premium per transaction swelled from $55 million in 2018 to approximately $90 million in 2022, a 62% increase.
Insurer participation has increased significantly. The number of active insurers has nearly tripled since 2016, reaching 21 in 2022 and holding steady through 2024. This expanded playing field has intensified competition, potentially yielding more favorable terms for plan sponsors. In 2022, 10 insurers each received over $1 billion in premiums, with three capturing more than $10 billion each – accounting for 68% of the total market premium.
Recent large-scale transactions highlight the market’s capacity for mega-deals. Already in 2024, we have seen Shell’s $4.9 billion lift-out, Verizon’s $5.9 billion transfer, and 3M’s $2.5 billion deal. These follow significant transactions in previous years, such as AT&T’s $8.05 billion deal in 2023, which covered 96,000 participants.
The market’s strength is further demonstrated by competitive pricing. In 2023, 68% of Aon-led retiree lift-outs priced below the Projected Benefit Obligation (PBO), compared to 64% in 2022. This trend makes these transactions increasingly attractive to plan sponsors.
At the heart of this growth is the rise in interest rates, which hit a 23-year high of 5.25%-5.50% as of mid-2024. Higher interest rates lead to lower pension liabilities on company balance sheets, as future benefit payments are discounted at a higher rate. This effect boosted pension funding ratios to 104.9% by February 2024, up from 101.7% a year earlier. Simultaneously, rising rates make it less expensive for insurers to provide guaranteed benefits, reducing the cost of PRT transactions for plan sponsors.
This economic backdrop creates a double incentive: companies with well-funded plans can “lock in” their improved funded status, while the opportunity cost of keeping pension risk on the books increases. The result is a surge in PRT activity, with total transaction volume projected to cross $50 billion in 2024.
How is The UK PRT Market Booming?
The UK pension risk transfer market is transforming profoundly, shattering records and reshaping the pension landscape. In 2023, transaction volumes soared to £50 billion, nearly doubling the £28.0 billion recorded in 2022.
Mega-deals are becoming increasingly common, with over 20 transactions exceeding £1 billion quoted in 2023 alone. The Boots Pension Scheme completed a £4.8 billion buy-in with Legal & General. In comparison, two pension schemes of the RSA Group secured a combined £6.5 billion buy-in with Pension Insurance Corporation (PIC), marking the largest overall transaction to date. Through a series of transactions culminating in a £2.7 billion buy-in with Legal & General in 2023, the British Steel Pension Scheme became the largest UK pension scheme to fully insure its members’ benefits, totaling £7.5 billion.
A notable trend is the evolution of transaction approaches. Many schemes are now opting for “sole insurer” arrangements, partnering exclusively with one insurer throughout their derisking journey. This approach allows for more tailored solutions and potentially better pricing over time.
The market is also adapting to challenges posed by scheme assets, particularly illiquid holdings. UK Insurers are finding ways to accept these illiquid assets directly, allowing pension schemes to avoid selling them immediately. Additionally, they are creating flexible payment arrangements that align with the timeline of when these assets will mature or become easier to sell. These approaches help ensure that pension schemes can complete their buyouts smoothly, even when they have investments that are not easily liquidated.
The introduction of Solvency II reforms has adjusted how insurers calculate their liabilities and capital requirements. Specifically, changes to the “matching adjustment” rules have allowed insurers to back their annuity liabilities with a broader range of assets, potentially improving their pricing for bulk annuity deals. Additionally, the reduction in the risk margin required for annuity business has further enhanced insurers’ capacity to offer competitive pricing.
The Pensions Regulator has also been instrumental in encouraging market activity. It has introduced requirements for schemes to set long-term objectives, often targeting buyouts. This regulatory push has prompted many schemes to develop journey plans towards full risk transfer, even if the ultimate transaction is years away. The regulator’s emphasis on integrated risk management has also led schemes to view buy-ins and buyouts as effective tools for managing scheme risk.
The UK PRT market shows no signs of slowing. Industry experts project annual volumes could consistently reach £40-50 billion over the next five years.
How is the Canadian PRT Market Booming?
The Canadian PRT market is on its steady upward path. In 2022, the market achieved $7.8 billion in total sales from 155 transactions, a slight increase from $7.7 billion the previous year. In Q2 of 2024, the market volume of annuity purchases by Canadian defined benefit pension plan sponsors reached an estimated $2.5 billion, compared to $1.1 billion in the previous quarter.
Canada experienced a series of interest rate hikes from March 2022 – July 2023, with 10 rate increases noted. These higher rates have allowed insurers to back their obligations with higher-yielding assets, making PRT transactions more cost-effective for pension plans. More recently the Bank of Canada has begun cutting rates, with two 25-basis-point cuts in June and July 2024.
The PRT landscape in Canada is characterized by a few dominant players. Sun Life Financial continues to lead the market with nearly a 35% share. Brookfield Annuity, together with Sun Life, accounts for over 50% of the Canadian PRT market. This concentration of market share among 7-8 key players distinguishes the Canadian market.
Regulatory developments have further contributed to market growth. In May 2023, Assuris, Canada’s policyholder protection agency, announced an increase in its protection levels for different insurance products. This upgrade provides greater security for annuitants and enhances the attractiveness of PRT transactions.
Conclusion
Beneath the statistics lies a simpler truth – companies worldwide are choosing certainty over risk, stability over volatility.
Across all three markets, rising interest rates and improved funding ratios have created a favorable environment for PRT. This convergence of economic factors and evolving corporate strategies has allowed them to grow to unprecedented levels.
The successes and challenges faced in these markets will shape the future of pension risk management globally. As companies and pension schemes across the world grapple with long-term obligations, they will undoubtedly look to the experiences of the US, UK, and Canada for guidance.