The time is ripe for the business, as rising interest rates have reduced the estimated value of future obligations for many pensions. That means many plans currently have enough assets to meet all predicted liabilities, giving employers an opening to offload their obligations without having to put up cash to fill a gap.
Companies in the US struck a record $51.9 billion worth of deals last year involving a key form of pension risk transfer, according to consulting firm Milliman’s analysis of data from trade group LIMRA. In a large deal, AT&T Inc. transferred more than $8 billion of pension obligations owed to 96,000 people this year to Apollo Global Management Inc.’s insurance arm, Athene.
In Britain, where like others Carlyle sees an opportunity, fewer than 10 insurers are seen as ready to absorb pension plans’ liabilities as regulation, high capital adequacy requirements and the hefty investment needed in resources make it harder for new players to enter the market.
UK insurers have capacity for only £40 billion ($51 billion) to £60 billion a year, according to pension consultants and asset managers. That’s a fraction of the assets they’ll need to take on in coming years when thousands of UK pension plans will likely aim to do these deals.
Insurers need to have an ample cash cushion and convince regulators they won’t fail if they absorb these liabilities. Reinsurers that provide capital relief can free up insurers’ balance sheets, though increased regulatory scrutiny could stymie their growth.
The Bank of England’s Prudential Regulation Authority warned in November that the growth in insurers shipping off liabilities to overseas reinsurers and institutions that made illiquid bets could threaten the stability of the financial system. The regulator expressed concerns over a potentially “rapid build-up of risks in the UK life insurance market” and proposed ways for insurers to keep risks in check.
This article was provided by Bloomberg News.