This has had a compounding impact on the premium rates insurers charge for BPA policies.

The strong demand from trustees and sponsors of pension schemes to purchase BPAs during 2019 gave insurers a strong negotiating hand to choose which counterparties they would engage with. Consequently, insurers’ focus has gravitated towards larger transactions (where the prize was worth the risk of being unsuccessful). Whilst competition amongst insurers enabled larger schemes to maintain a comparatively strong negotiating position, insurers’ strong pipeline of business opportunities has caused their appetite to price aggressively to be muted.

For smaller schemes, with negotiating levers being much more limited, the only route to market was often to partner with a single provider. Under this approach, the insurer is set a price target that is required to meet for the transaction to proceed. Even where such an approach is followed, the expectations of managers and trustees of schemes looking to carry out very small transactions have had to be carefully managed: the smaller the transaction, the poorer the terms offered.

In January and February, it looked like 2020 would follow a similar narrative to 2019. Insurers continued to anticipate a strong pipeline of activity, albeit the average size of transactions was expected to fall slightly as they expected fewer £1bn+ in transactions to complete in 2020 compared to 2019.

The challenges following COVID-19

Everything changed in March as it became clear that COVID-19 had become a global pandemic and that, in addition to human suffering and deaths, there was going to be a severe downturn in the global economy. Companies across the globe are scaling back their operations and seeking, where possible, to preserve cash.

Consequently, discretionary expenditure is being deferred or cancelled. This extends to pension de-risking projects, with insurers now anticipating a curtailment to their 2020 pipeline as companies (a) are less inclined to pay cash top-ups to cover funding shortfalls against the cost of buying out a pension scheme’s liabilities, (b) consider the negative accounting impact of a BPA transaction on the company’s balance sheet as unattractive, and (c) are withholding budgetary approval in respect of the costs of transacting a BPA.

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