What a £550bn BPA market really means

The consultant's report, published in November, says that high funding levels among schemes and strong insurer demand mean the market could reach up to £550bn in size by 2035. With the sheer size of the BPA market showing no immediate signs of diminishing, questions naturally turn to the repercussions this could have for the pensions industry.

Concentration risk and struggling administrators

Ultimately, these transfers will see a growing number of schemes funnelling billions of assets into a select number of insurers.

Mercer senior investment consultant James Brundrett sees this as creating concentration risk as more schemes' allocation is driven by the same endgame goals.

"The underlying investment strategies, whilst on the whole well managed and regulated, are relatively narrow in nature and rely heavily on the same markets," says Brundrett.

Expanding on this, he points to how schemes will shift their allocations to win favour with schemes (or at the very least chime with Solvency regulations). Historically insurers have favoured holding credit and swaps instead of gilts, although he explains this is currently not the case due to tight investment credit spreads and high long dated gilt yields.

"However, if insurers do go back to not favouring gilts that could put upward pressure on long-dated gilt yields eventually as there are more sellers than buyers, as DB pension schemes have been the main buyers," adds Brundrett.

UK DB schemes now own a vast proportion of the gilt market, with allocations growing significantly as these mature and schemes become better funded.

LCP has also researched this area and partner Steve Hodder suggests the reality of pension gilt ownership is much higher than official statistics would portray, with schemes buying gilts through numerous routes.

"If the BPA market continues to grow at c£50bn a year, then that means tens of billions of gilts sold," says Hodder. "This adds to the pressure on the gilt market from the Bank of England looking to sell their own vast stocks of gilts bought under quantitative easing."

In response, Hodder says the Debt Management Office (DMO) is issuing shorter gilts with some success but this creates a greater need to raise more debt as bonds mature.

"We have also seen UK borrowing costs go from around the cheapest of comparable economies, to around the most expensive," adds Hodder. "It's easy to see that trend continue as two stalwart large holders of gilts reverse their buying pattern of the past 20 years."

Looking ahead, XPS partner and head of risk settlement Stephen Purves sees the majority of this activity being taken up by 10 or so BPA providers in the next decade. He argues this not only heightens the emphasis on schemes' risk management and member communications, but also putting a great deal of responsibility at the door of insurers.

"From an asset perspective, annuity portfolios across the key insurers are continuing to grow, but insurers need to work hard to do this, with the ever-increasing maturity of pension scheme liabilities running off each year," says Purves. "This means some insurers need to write [billions] of business each year just to stay still."

Such healthy BPA activity is also creating real-time operational considerations for administrators.

From intensive data audits, to cleansing for GMP equalisation, some administrators are facing significant challenges within their schemes.

Trafalgar House Pensions Administration director Dan Taylor says the "operational impact" of BPA preparation cannot be overlooked and intensifying competition will further open up the gap between leaders and laggers.

"We're seeing a growing divide between schemes that have laid the groundwork for years and those still wading through decades-old issues," says Taylor. "The irony is schemes can spend months lining up asset strategies and insurer panels, only to be tripped up by benefits that don't add up or records that don't reconcile.

"The risk isn't just missing out on pricing windows; it's being left behind entirely."

It doesn't help that administrators are facing their own challenges from a resource perspective. TPR data shows that 80% of administrators see recruiting skilled and experienced staff as a challenge, with 59% feeling the same about retention.

Cartwright senior investment consultant and head of investment (North) Yona Chesner says BPA experience will improve standards but the space still faces resource issues to support schemes properly.

"You still need a lot of professionals to deal with that business administration, and then you've got the data cleansing and preparation and all of that is pretty intensive," says Chesner. "It's not a big secret that it's becoming a bottleneck. We're not growing the number of seasoned professionals and that could be a problem."  

Evolution of the space

There have also been concerns raised about how competitive the BPA space is.

In 2024, this prompted the Department for Work and Pensions (DWP) to propose establishing a public sector consolidator to provide recourse for smaller schemes struggling secure transactions. The government has since confirmed it will not legislate for a new consolidator, citing complexity, but conceded it would continue "to explore" viability.

In terms of competition and health, the LCP report summarised that the BPA space as "working well" with new entrants allowing even smaller schemes able to participate in transactions.

One of the causes for this optimism is greater engagement from major private market operators. Apollo's Athora, Brookfield and Blackstone have all recently acquired major stakes in UK insurers with the aim of gaining access to BPA activity. Though this may deepen the pool of capital available for transactions, Mercer's Brundrett conversely sees these deals as highlighting the commercial pressures at play between insurers.

"These players will be looking to invest more of the underlying portfolio in private market assets to increase the return on the assets and profitability to shareholder and improve their competitive pricing for BPAs," says Brundrett. "That will cause other insurers in the market to reassess their approaches to investing to avoid becoming uncompetitive."

Systemic concerns

The BPA market may be healthy and competitive, but its sheer size has not gone unnoticed by the regulators, for whom a key concern is monitoring for potential systemic risks that may be developing. The Prudential Regulation Authority (PRA) has been paying more attention to the issue with Gareth Truran – executive director of the regulator's insurance supervision – going into detail about this in an April 2025 speech.

"Our job is to make sure insurers taking on these liabilities remain safe and sound, and that the sector can continue to fulfil its critical economic functions of providing retirement income to policyholders and long-term investment throughout the cycle," said Truran. "It's important the sector can safely absorb the high projected volumes of new BPA business"

This approach was reflected in the PRA's most recent  2025 Life Insurance Stress Test (LIST) which looked at the largest BPA writers, assessing areas such as asset concentration. Although the results confirmed the industry's ability to withstand these effectively, some remain wary.

"Systemic risks are always the ones which hit hardest, and often the hardest to see in advance," says Chesner. "It's not from the nature of individual schemes or actors making bad decisions, but more from the fact that everyone's making the same reasonable decisions. If there's a downside event, everyone's kind of aligned to that same event."

Though the LCP report had a positive outlook for the health of the BPA space, the firm concedes that the momentum of this trend does introduce more risk. One of the report's authors, and a partner in the firm's pension risk transfer team, Charlie Finch, says this ultimately results in a "small number of insurers with substantial annuity holdings." As way of example, he points to L&G which has £80bn of annuities in the UK but still plans to write up to £65bn of business by 2028.

"This growth inevitably introduces a greater concentration of systemic risk within a small number of financial institutions, [that] will be responsible for paying millions of people's pensions," says Finch. "This is an issue the PRA is live to and has taken proactive steps to manage – allocating more people and resources to the BPA market so they can apply a greater level of scrutiny."

Finch takes solace from both the "overall strength" of the UK's regulatory regime and the "natural ebb and flow" of insurers' capacity to take on these deals. Others are also taking comfort from the sophistication and liquidity of the latter. Brundrett is in this camp – pointing out if an insurer needs to pause, others can quickly step in – but argues the worst case scenario still needs to be considered. He posits this as insurers' relatively new books of businesses getting "too big to fail" in a bailout scenario.

"I think we are not far off," adds Brundrett. "There's very little money set aside in the Financial Services Compensation Scheme to underwrite insolvencies instead relying on levies on the industry, and risks may be greater going forward with higher private asset allocations."

Jon Yarker is a freelance journalist