Evolving Perspectives, UK Pension Risk Transfer and its Capital Supply

How Market Dynamics, Reinsurance and Alternative Risk Transfer have the Potential to Reshape the UK Retirement Market

Retirement in the UK, the Defined Benefit and Defined Contribution markets

The UK pensions landscape is undergoing a period of significant change, driven by market conditions, regulatory reform and the introduction of, and further potential for, new risk transfer solutions. These forces are reshaping retirement outcomes for members and redefining strategic priorities for insurers. Opportunities are being created for new entrants, and the overall demand is reinforcing the role of reinsurance and other capital providers in supporting the pensions market.

This article explores the factors shaping today’s pensions landscape, the use and supply of reinsurance, the potential for new alternative risk transfer solutions, and what each of these developments may mean for the UK market going forward.

The Defined Benefit market

UK policymakers recently introduced a number of reforms to pensions¹The UK Parliamentary Pension Schemes Bill can be found here: https://bills.parliament.uk/bills/3982, including:

• Providing additional flexibility for how schemes can share surplus with the scheme sponsor and members; and
• A new legislative framework for Defined Benefit (“DB”) superfunds authorisation and supervision, replacing the Pensions Regulators interim regime.

Run-on options can now take several shapes, including remaining with the existing sponsor, transferring responsibility to a new sponsor via a flexible apportionment arrangement (“FAA”) or via transfer to a superfund.

This gives increased optionality around the “endgame” for pension schemes as well as impacting the volume that will reach the insurance market via Bulk Purchase Annuities (“BPA”s).

Despite the reforms and this increased flexibility around run-on options, sponsors and trustees continue to show appetite for complete risk transfer to remove balance sheet volatility and provide certainty over member benefits. Strengthened funding levels since 2022, driven by higher yields, have enabled record numbers of schemes to seek insurance solutions. UK BPA volumes reached just shy of £50bn²The ABI report can be found here: https://www.abi.org.uk/news/news-articles/2025/2/scale-of-annuity-providers-investment-in-uk-revealed/ in 2023 and 2024, and as company results are being released at the time of writing, the market is expecting volumes to remain around £40bn in 2025. Projections are yet to suggest this dip is the start of a material trend or drop off, given there has been no change to affordability or the underlying reasons why schemes buyout.

This continued demand is both an opportunity and a challenge for insurers. During 2025, insurance margins tightened as heightened competition and lower spreads increased pricing pressures. As a result, capital efficiency remains a necessity for both pricing and capacity.

The Defined Contribution market

The market has also experienced developments in the Defined Contribution (“DC”) space. Master Trusts now provide around 30%³The Pensions Age article found here: https://pensionsage.com/pa/Number-of-large-master-trusts-continues-to-rise-member-engagement-remains-disappointing.php of employer DC plans. Policymakers have been explicit that improving outcomes at retirement, and not merely during accumulation, is a priority. Insurers are looking to understand the role they can play in this emerging retirement market.

Alongside this, in 2025, insurers in the more established individual annuity market collectively experienced the highest annual level of premiums paid into annuities since pension freedoms were introduced⁴The ABI report can be found here: https://www.abi.org.uk/news/news-articles/2026/2/2026-annuity-data/.

These developments, including DB transaction volumes, tighter margins, and evolving DC endstate expectations, all point to a competitive market increasingly reliant on capital supply and efficiency, whether via reinsurance or otherwise.

The evolving demand for reinsurance

Reinsurance continues to play an important role in helping shape the UK PRT market. Longevity swaps have been used by UK pension schemes to manage risk since the mid-2000s and for BPA insurers since well before the introduction of Solvency II (“SII”) in 2016. The emergence of funded reinsurance for BPA around the early 2020s further expanded the toolkit available to insurers. Both solutions have enabled holders of annuity-type risk to better manage capital, even as regulatory reforms, such as the reduction of the SII Risk Margin⁵The Treasury’s Insurance and Reinsurance Undertakings (Risk Margin) Regulations 2023 can be found here: https://www.legislation.gov.uk/uksi/2023/1346/made, reduced the headline capital benefit. In many cases, new insurers that have entered the BPA market have moved quickly to utilise longevity reinsurance as part of their operating models. This section examines the core reasons why reinsurance continues to be a critical tool, including:

• Risk management and risk reduction;
• Longevity pricing expertise; and
• Asset sourcing.

Reinsurance plays an important risk management function for companies whose obligations are concentrated in longevity risk and who have limited exposure to other lines of business, such as mortality products, which might otherwise provide natural diversification. Insurers are able to remove their direct exposure to longevity risk by using longevity swaps, and additionally market risk when using funded reinsurance, with commensurate reductions in their Solvency Capital Requirement (“SCR”).

New entrants in particular often rely on reinsurers to support their own pricing and underwriting of annuity risks, with the reinsurance price supporting their offering to schemes and policyholders. Insurers value arrangements that provide certainty and speed to their front-end quotation process. Flow treaty reinsurance, established frameworks with partner reinsurers, and rapid binding of reinsurance quotations can all facilitate this.

Insurers utilising funded reinsurance benefit from the asset sourcing capability of the reinsurer. Through private asset expertise in particular, these reinsurers are able to source or structure assets that generate higher yields whilst meeting SII Matching Adjustment eligibility requirements. This yield enhancement translates into lower reinsurance prices for the insurers. Although the insurer is not directly exposed to the credit default and downgrade risks of the assets, the recapture and counterparty default risks increase with funded reinsurance.

With the benefits described above, the use of reinsurance has been important for BPA pricing amid tightening margins and increased competition. In particular, insurers rely on reinsurance to manage capital strain, supporting transaction volumes without compromising solvency positions.

Why reinsurers are at­tracted to this market

The UK market, with its extensive pension risk exposure and activity, continues to attract interest from across global markets. While alternatives are beginning to emerge, unless you intend to compete amongst other BPA players, through a direct insurance entity, the provision of reinsurance remains the primary route to market.

As pension schemes and insurers look to manage the uncertainties around life expectancies and to optimise capital efficiency, reinsurers are incentivised to participate by offering longevity reinsurance and/or funded reinsurance solutions. This section explores each of the key motivations to supply reinsurance to the UK PRT market, including:

• The appeal of volume growth;
• The diverse market entry routes;
• The opportunity to capitalise on technical capability;
• The diversification benefits; and
• The opportunity to deploy capital.

The continued expansion of BPA transactions, fuelled by increased pension scheme de-risking incentives and subsequent activity, as per Section 1, has led to an increase in demand for risk transfer solutions. Reinsurers are drawn by the scale of opportunity. The market consistently delivers transactions that they expect to be profitable, and promises ongoing growth, making the upfront effort of developing operational and technical capability in order to enter the market worthwhile.

Reinsurers now benefit from an increasing number of routes to market, catering to different risk appetites and strategic objectives. Direct deals with BPA insurers, whether via one-off facultative arrangements, partnership frameworks, flow treaties, or funded reinsurance, provide near-immediate access to sizeable blocks of risk. Partnerships with fronting insurers providing longevity swaps to pension schemes or with pensions captives intermediating between the schemes’ longevity and/or market risks offer alternative avenues for reinsurers.

There are other participants in the PRT market that, despite the appeal of assets under management, do not have appetite for longevity risk. This may include, for example, companies taking over sponsorship responsibility following an FAA and some of the providers of funded reinsurance. This creates an opportunity for reinsurers that seek longevity risk. Further still, the increasing demand for DC decumulation solutions creates scope for reinsurers to engage with innovative products and evolving market segments. This breadth of opportunities allows reinsurers to diversify sources of sales and increases the chances of success.

The ability to deploy specialist expertise in both longevity and funded reinsurance is an important incentive for reinsurers. Those with extensive experience in modelling longevity trends, and/or in asset allocation and structuring of illiquids for asset-backed arrangements, can capitalise on, and offer, sophisticated risk assessment, pricing, and asset management capabilities. This advantage not only underpins accurate risk selection and management but also supports client confidence, helping the development of long-term partnerships with insurers and pension schemes.

Writing longevity or funded reinsurance arrangements provides valuable diversification benefits for reinsurers that have substantial amounts of mortality or general insurance (“GI”) risk. For example, this balancing of risk is common with US reinsurers with large protection portfolios, where the annuity risk can provide a hedge against some of the mortality risk they are exposed to.

Exposure to demographic risk, and writing reinsurance more generally, creates an attractive option for capital deployment that is not purely investment related. There is potential for higher returns compared to alternative investments, particularly during low credit spread environments. There is a natural synergy between parties taking on, or passing on, the risks that they want and don’t want, respectively.

This non-exhaustive but encouraging list of reasons to participate in the UK PRT market is not exclusive to reinsurers, but also applies to other investors and capital providers, not least given the potential volume, diversity of opportunity and low correlation with other risks. We expect these drivers to entice new entrants in the coming years.

The future of the PRT capital supply

The sections above highlight the motivations for the use of reinsurance and the appeal for investors and firms to provide capital to the market in this way. Reinsurance will undoubtedly play an important role in the provision of capital to the PRT market over the next ten years. The questions that follow are:

• Where, and under what structures, will reinsurance operate?
• What are the risks to the continued supply of capital in this form?
• How might other forms of capital supply respond to these risks?

For the “where”, the use of reinsurance within BPA is very likely to continue. Perhaps what is more uncertain is the extent to which DC decumulation activity, outside of existing retail annuities, will utilise this form of risk transfer. Particularly when bundled together, the longevity risks underlying DC pensions look similar and are arguably more easily understood than that of BPAs. This suggests, at a minimum, that reinsurer appetite for bundled DC risks may follow that of DB pensions.

The “what” form reinsurance will take is currently somewhat in limbo, longevity swaps aside. The PRA acknowledged⁶The PRA Vicky White speech can be found here: https://www.bankofengland.co.uk/speech/2025/september/vicky-white-speech-at-the-bank-of-america-annual-ceo-conference that funded reinsurance can be “a valuable source of patient, loss absorbing capital”, but questioned whether “the current regime is supporting the right behaviours in a sustainable way”. While the conversation around the future of funded reinsurance is a subject deserving its own article, it is clear the regulator is unlikely to allow growth in funded reinsurance in its current form, and with its current capital treatment, at the rate of the recent trend. However, a version of asset-intensive reinsurance is likely to continue to exist on some insurer balance sheets (albeit perhaps at a lower percentage than current aggregate limits might allow).

Regulatory uncertainty, such as that around funded reinsurance, is one of the key risks to the continued supply of reinsurance to UK PRT. Additionally, with the recent harmonisation of regulatory frameworks globally, there is also the risk that rules under which the reinsurers operate change. An increase to the regulatory capital requirements, particularly around longevity risk, could deter otherwise interested firms from entering the UK PRT market.

Although not directly in response to these such risks and yet still related, in 2025, HM Treasury and PRA provided statements and papers on the use of other forms of capital supply. On 15 July 2025, Treasury published its consultation “Changes to the Risk Transformation Regulations”,⁷The HM Treasury policy paper can be found here: https://www.gov.uk/government/publications/changes-to-the-risk-transformation-regulations proposing reforms intended to expand and modernise the UK’s insurance‑linked securities (“ILS”) regime and to widen the scope of the Risk Transformation. Despite not specifically linking the proposal to life risk transfer, the consultation is framed around ILS spreading insurers’ risks, financing new business and growing the insurance sector.

Following this, on 24 July 2025, the PRA shared its initial expectations for the use of Special Purpose Vehicles (“SPVs”) within Supervisory Statement 2/25 (“SS2/25”)⁸The PRA supervisory statement can be found here: https://www.bankofengland.co.uk/prudential-regulation/publication/2025/july/prudential-considerations-for-insurance-and-reinsurance- undertakings, communicating that SPVs were not to be used to transform the risks associated with annuities. It highlighted the recapture risks driven by the higher risk of deterioration of assets that would be used in an SPV to back the long-term annuity liabilities, the lack of diversification and limited management actions available, and that it would therefore not expect a cedant’s overall level of capital held for risks arising from annuity business to reduce through using an SPV.

In November 2025, the PRA released Discussion Paper 2/25 (“DP2/25”)⁹The PRA discussion paper can be found here: https://www.bankofengland.co.uk/prudential-regulation/publication/2025/november/alternative-life-capital-discussion-paper, titled “Alternative Life Capital: Supporting innovation in the life insurance sector”. It emphasised the challenges and costs in life insurers’ access to capital. PRA discussed examples of structures being used in other markets, including those within GI, such as ILS and reformed Insurance SPVs (“ISPVs”), banking-style Synthetic Risk Transfers (“SRTs”) and the use of sidecars and joint ventures in the life insurance markets across other jurisdictions. PRA raised questions to the market on how increased flexibility in the use of alternative life capital might affect the UK life insurance sector, potentially suggesting a positive development in the attitude towards these solutions. However, PRA is yet to propose policy changes to unwind the restrictions in SS2/25.

Taking inspiration from general insurance

In GI, the London Market continues to act as the largest global speciality underwriting hub for Property and Casualty (“P&C”) business, doubling in size over the last ten years¹⁰The London Market Group report can be found here: https://lmg.london/news/london-market-remains-a-global-leader-but-challenges-remain/. Continued demand-side growth is expected from key areas, such as cyber, AI and energy security. However, unlike the UK life market, GI has arguably already developed the infrastructure to support this growth through both traditional and alternative sources of capital.

London Bridge, an onshore ISPV regime, has emerged as the leading capital market linked structure in UK GI. Although London Bridge was designed specifically for GI business, and the structure is not directly transferable to the life space, it still serves as an important case study for the life market.

London Bridge operates as a UK‑incorporated protected cell company (“PCC”), with each cell fully ring‑fenced and on a limited recourse basis, ensuring that assets and liabilities remain isolated and bankruptcy risk remote. Investor capital is deployed, and transactions can be structured either as fully collateralised reinsurance or as note issuances similar to catastrophe bonds, offering flexible participation options. The “reinsurance to close” (“RITC”) mechanism provides a defined three‑year exit, and the PRA and Financial Conduct Authority (“FCA”) have authorised the platform to reinsure business and issue securities without case‑by‑case approval, significantly reducing regulatory friction and accelerating execution.

As inspiration for the life market, London Bridge demonstrates that a scalable onshore SPV regime can successfully attract institutional capital and support repeatable transaction execution. Pre‑approved, low‑friction regulatory models can significantly shorten execution timelines. Strong ring‑fencing

and limited recourse mechanics build investor confidence. Standardised infrastructures materially reduce legal complexity and transaction costs. However, life liabilities are structurally very different from short‑tail P&C risks. A life ISPV would need to support multi-decade-long exposures and associated capital and collateral arrangements, which the London Bridge framework was not designed for.

London Bridge provides an example of how a UK onshore SPV platform could scale, attract institutional capital, and deliver an efficient risk transfer infrastructure, and is a reference point for the PRT market. Although this idea aligns with the PRA’s communication around the need to explore alternative forms of capital, as per DP2/25, translating this success to the PRT market will not be straightforward, required policy changes aside. Unless structural challenges around collateral durability, diversification, and PRA mandated capital retention can be resolved, any life‑adapted SPV regime will remain conceptual rather than immediately deployable.