Financial Inclusion and Markets Centre (FIMC) has submitted a response to the PRA’s proposals contained in CP8/26 on funded reinsurance and, specifically, in relation to bulk purchase annuities (BPA) used to transfer valuable defined benefit pension scheme commitments to poorly regulated life insurers who manage the pensions of millions of people in the UK. See: FIMC submission CP8-26 0726 final
We are pleased that the PRA has recognised the significant risks associated with the growth in the use of funded reinsurance and the BPA market. We support the PRA’s intention to better align the regulatory treatment of funded reinsurance with that of economically similar assets in the market.
We are hopeful the proposals in CP8/26, with respect to future pension transfer arrangements, should: i. encourage a more responsible approach to the use of funded reinsurance by insurers; ii. address competitive distortions in the BPA market between insurers that use funded reinsurance and those who do not; and iii. force insurers to adopt a more realistic approach to pricing of BPA deals and cause pension scheme trustees to reconsider transferring pension liabilities to life insurers covered by the weak Solvency UK regime.
But, we do not think the proposals go far enough to mitigate the funded reinsurance risks
related to future arrangements. For future arrangements, rather than aim for a capital
charge of around 10% of liabilities, we argue the PRA should aim for the upper end of the
11-15% range currently applied to economically similar assets.
Moreover, existing arrangements (including those made between now and the cut-off
date of 30/9/2026) will not be covered by the CP8/26 proposals. We appreciate the PRA cannot apply the capital charge measure retrospectively to specific in-force funded reinsurance arrangements due to the disruption this would cause. However, now that the PRA has quite rightly raised major risks associated with funded reinsurance, it surely cannot leave these legacy risks unaddressed. Therefore, we urge the PRA to consider deploying supplementary capital tools to ensure equivalent prudential regulatory treatment of firms which used funded reinsurance for previous BPA arrangements and those who did not.