David Rule: An annuity is a very serious business: Part Two

Speech by Mr David Rule, Executive Director of Insurance Supervision of the Bank of England, at the Westminster and City Bulk Annuities Conference, London, 10 April 2019.

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

A year ago, I spoke to this conference about the risks facing insurers active in the bulk purchase annuity market. In particular, I discussed the treatment of unrated, direct investments under the Solvency II Matching Adjustment, with a particular focus on equity release mortgages. A year later and the movement of defined benefit pension liabilities from employers to insurers has continued apace. Around £30 billion of risk was transferred in 2018, if you include buy outs, buy ins and longevity swaps. Most commentators expect the market to continue to grow. On the demand side, more employers might be in a position to afford a buy out if improvement in life expectancy stalls, interest rates rise and asset values increase. On the supply side, the possible emergence of superfunds could create an alternative to insurers. Meanwhile, the current level of transactions is still dwarfed by the scale of remaining defined benefit (DB) liabilities of some £1.8 trillion, of which nearly £1.1 trillion are closed to new members.

Today I want to discuss more generally the risks associated with insurers taking on significant annuity obligations. I will then show how, in my view, the PRA's implementation of Solvency II does a good job of addressing these risks. In particular, it gets the balance right between protecting policyholders and allowing insurers to invest for the long-term in ways that support the UK economy. Design flaws in the risk margin, however, remain a problem. Finally, I will raise some particular issues facing insurers active in this market, including 'fallen angels', internal ratings, equity release mortgages and risks from climate change.