BoE tells insurers not to overextend into pensions

Bank of England

BoE had to purchase UK government bonds in September 2022 after LDI funds used by pension schemes grappled to find sufficient liquidity to pay collateral on soaring gilt yields

The Bank of England (BoE) cautioned insurers on Thursday not to over stretch themselves in grasping more business from pension schemes longing to offload risks.

BoE’s executive director for insurance supervision, Charlotte Gerken, stated that in the face of significant urge to capture business opportunities, insurers need to exercise caution.

Bulk purchase annuities (BPA) are long-term policies from life insurers for firm DB, or final salary, pension schemes.

Growing interest rates have enhanced funding levels of pension schemes, making them less expensive to offload to an insurer and industry is getting ready for record levels of transfers, Gerken stated.

As deals become bigger and growingly targeted at buy-outs of complete schemes, we note bulk purchase annuity writers stretching their risk appetite, at times beyond their current core expertise, she stated.

Insurers may be tempted to extend their capabilities in the near term before leaner years come, she stated.

UK life insurers could take on over £500bln of pension liabilities over the next ten years, Gerken stated.

This is a major structural change in the control of long-term investments in UK, and the decisions that insurers make at present will have long term impact on the performance and development of the wider economy, she stated.

BoE had to purchase UK government bonds in September 2022 after LDI funds used by pension schemes grappled to find sufficient liquidity to pay collateral on soaring gilt yields.

Insurers will have to safeguard their pension risks with interest rate, cross currency and inflation trades, growing the sector’s connections with the broader financial system, Gerken said.

Insurers thus need to recognise, as they take on these huge amounts of assets and liabilities, how they may turn into bigger sources or amplifiers of liquidity risk, she stated.

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