Sam Matto-Willey, Senior Consultant, Aon
The bulk annuity market is expanding – both in the number of insurers participating, and in terms of innovation. This momentum requires an engaged regulator, as the Prudential Regulation Authority (PRA) looks to safeguard policyholders while supporting a competitive market environment.
The implementation of the final stage of the post-Brexit ‘Solvency UK' regime at the end of 2024 gave the PRA a refreshed rulebook and a clean slate heading into 2025.
Testing resilience – LIST 2025
This year, the PRA carried out the latest instalment of its Life Insurance Stress Test (LIST), which focused on the bulk annuity market. The exercise tested how bulk annuity insurers would cope with a "severe but plausible" financial market shock.
The headline results were reassuring, with all insurers remaining well capitalised and above their solvency capital requirements, prompting the PRA to conclude that the sector was resilient to the scenario tested.
Beneath the headline, however, the results highlighted meaningful variation between insurers. In a recent Aon poll, 70 percent of pension scheme stakeholders thought that LIST would be a valuable tool for selecting an insurer for a bulk annuity transaction. At the same time, respondents were clear that LIST would only be one component in a broader assessment rather than a shortcut to decision-making. For trustees, LIST could be a valuable lens on insurer resilience, but not a replacement for holistic financial and operational due diligence.
Funded reinsurance under scrutiny
‘Funded reinsurance' refers to an insurer passing some of the asset risk from its annuity book to a reinsurance company, typically based overseas.
New regulations in 2024 set a higher bar for insurer risk management of funded reinsurance practices. In 2025, funded reinsurance has received continued PRA focus, with appropriate regulation high on their supervisory and policy agenda.
The LIST exercise included a timely stress scenario examining the risks associated with the failure of a funded reinsurance counterparty. Whilst the aggregate impact was perhaps limited at first glance, the PRA indicated that the information gathered may be used to shape future policy.
Notably, the regulator chose not to publish individual insurer results from the funded reinsurance scenario. That choice was at odds with stakeholder sentiment. In a recent Aon webinar poll, 73 percent of respondents said they would want the PRA to publish more individual results, noting particular interest in funded reinsurance.
It is clear funded reinsurance is a point of focus for trustees as part of due diligence exercises. Points of differentiation between insurers are becoming more important; with many schemes in surplus and backed by strong existing covenants, there is greater scope to be selective when choosing an insurance partner.
Termination rights attracting new focus
The PRA have also turned the spotlight on to the use of solvency-triggered termination rights (STTRs) that apply for some large bulk annuities. These provisions allow schemes to terminate a bulk annuity contract if an insurer's solvency position drops below a certain, pre-agreed level before buyout.
Whilst these might provide a layer of additional security for schemes, the PRA has highlighted potential liquidity and operational concerns for the insurer in a downside event. If a solvency trigger was breached, multiple schemes could exercise these rights simultaneously. Tight contractual deadlines could cause operational challenges for insurers and impact the liquidity of their remaining asset portfolio.
At the end of 2024, the PRA estimated that £50 billion of bulk annuities had existing solvency-triggered termination rights. At this stage, no rule changes have been implemented, but the regulator has signalled it could act if insurers' risk management practices are judged to be falling short.
Supporting a productive economy
Alongside the PRA's primary objective of policyholder protection, it has a secondary objective to facilitate effective competition and support the competitiveness and growth of the UK economy.
Insurers' asset strategies for annuities are normally chosen to meet certain criteria from the PRA to be ‘Matching Adjustment' eligible - this refers to the requirements for a particular reserving treatment, essential to attain competitive annuity pricing.
October 2025 saw the implementation of the new ‘Matching Adjustment Investment Accelerator'. This allows insurers to seize suitable new investment opportunities without the delays associated with a full regulatory approval process to determine that the asset qualifies for the Matching Adjustment. Its use is constrained by defined limits and safeguards, but it is intended to allow more efficient investment decisions, including into UK-based productive assets.
What's to come in 2026
The PRA's focus on identifying and testing emerging risks underlines its intention to stay ahead of potential issues in an important and growing market.
The balance between protection and growth is likely to remain a defining theme for the PRA in 2026.
Next year is also expected to see significant insurer ownership changes take effect, with a decision of regulatory approval expected for both Brookfield's purchase of Just Group and Athora's acquisition of PIC.
For trustees and sponsors, the message is clear: staying close to regulatory developments and understanding the evolution of the market is an integral part of pension scheme de-risking. The PRA's priorities and insurer risk management practices, as well as the influence of trustees in requiring insurer accountability, will drive policyholder protection over the coming decades.
Further insight to the LIST exercise can be viewed on this recent recording
