David Rule: An annuity is a very serious business

Speech by Mr David Rule, Executive Director of Insurance Supervision of the Bank of England, at Bulk Annuities - The Expanding Market, Westminster and City, London, 26 April 2018.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Central bank speech  | 
11 May 2018
by David Rule
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  |  12 pages

Today I am going to talk about the bulk purchase annuity market, the increasing use by life insurers of illiquid assets - and in particular equity release mortgages - to back these annuities and the significance of the Solvency II matching adjustment. First, though, I want to reflect briefly on the UK life insurance sector as a whole. Standing here in 2018 it is a very different market to the one I might have been describing just 20 years ago. The big change is that most new life and pension products do not guarantee returns. The great majority of savings products are unit linked. And individual pensioners are increasingly choosing draw down products rather than annuities. In both cases, investment risks lie with the policyholders. Other things being equal, that should mean a less risky life insurance sector and fewer sleepless nights for a prudential supervisor like me. The other side of the current life insurance market though is managing the legacy of past promises. Two trends are clear here: first, a very active market in transfers of books of annuities and closed life books between firms, with insurers specialising in particular niches; second, transfers of annuities to life insurers from corporate, defined benefit pension schemes - the bulk purchase annuity market that is the subject of this conference.

Risks for insurers in the bulk purchase annuity market

The bulk purchase market has grown over recent years from a flow of around £5bn in 2010 to over £10bn in each of the past four years. With the funding position of many defined benefit schemes improving and company boards still keen to shed pension risks, commentators expect the market to expand further. Transfers in excess of £15bn are predicted this year.