Pension Risk Transfer Growth Fuels UK Insurance Rating

The growing popularity of pension risk transfer deals is behind an “improving” label for the U.K.’s life insurance sector, according to Fitch Ratings. Higher interest rates have led to an increase in the funded status of U.K. pension funds, which in turn has led to an increase in PRT transactions as companies seek to offload their pension liabilities.

The increase in PRT transactions is primarily responsible for Fitch’s optimism about the sector in the U.K.; the ratings agency identified a “neutral” outlook for 2024 for the life insurance sector throughout Europe.

Fitch also upgraded its outlook for the U.S. life insurance sector to “improving” from “neutral,” as insurers will benefit from higher interest rates, according to a separate report from the ratings agency.

Fitch noted that positives for the life insurance sector in Europe, like high investment returns, are offset by negative factors, such as lower household disposable income and slow economic growth, leading to the overall neutral outlook. European markets listed as neutral include France, Germany, Italy, the Netherlands and Spain.

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With 2022 data collected, the U.K. life insurance sector saw 28 billion pounds ($35.52 billion) in pension buy-ins and buyout market value, according to Fitch. Fitch forecasted 48 billion pounds in 2023, increasing to 65 billion pounds in 2024. PRT transaction volume in the sector peaked at 44 billion pounds in 2019, while there was less than 10 billion pounds in transactions per year between 2009 and 2013.

According to the U.K.’s Pension Protection Fund PPF 7800 index, which tracks the funded status for 5,050 pension schemes, the funded status of these schemes stood at 145.7% at the end of November 2023, up from 133.7% one year earlier.