UK life insurers may soon face higher capital requirements for funded reinsurance, which has emerged as a key tool in managing pension risk transfer business.
The Prudential Regulation Authority (PRA) is holding roundtables with insurers to consider whether new rules are needed, which could increase the capital insurers must hold when using funded reinsurance arrangements.
In a recent speech, PRA director for prudential policy Vicky White said the regulator is not seeking to ban funded reinsurance entirely, noting it can be “a valuable source of patient loss-absorbing capital.”
However, White also indicated that stricter capital rules could make funded reinsurance less attractive or even unviable for some insurers, depending on the final requirements.
Funded reinsurance, which transfers both assets and liabilities to a reinsurer – often based offshore – has been used by UK life insurers to support bulk purchase annuity (BPA) transactions. These deals, where insurers assume responsibility for pension scheme liabilities, have grown as more defined benefit schemes become eligible for insurance due to higher interest rates.
In 2024, insurers wrote £47.8 billion in UK pension risk transfer business, following £49.1 billion in 2023, according to Hymans Robertson. Several large transactions have been announced in the second half of 2025, including Legal & General’s £4.6 billion buy-in of Ford’s UK pension schemes and Pension Insurance Corp.’s £4.3 billion buy-in of Rolls-Royce’s pension scheme.
The PRA’s latest intervention focuses on whether the Solvency UK regime is too lenient on funded reinsurance. Under current rules, the funding element of these transactions is treated as risk-free, while a similar outcome using longevity reinsurance and a collateralized loan would require more capital. The regulator is exploring whether to “unbundle” the funding and reinsurance components for separate capital treatment.
Regulatory scrutiny on funded reinsurance has notably increased this year, especially as the PRA’s Life Insurance Stress Test (LIST) set out to assess insurers’ resilience under adverse conditions. In addition to regulatory testing, insurers are expected to closely monitor their exposure to credit-focused reinsurers as part of managing concentration risk in funded reinsurance deals.
Industry participants have expressed concerns about the proposals. Some see the changes as a “broadside attack on reinsurance as a tool,” while others argue that restricting funded reinsurance could limit investment in the UK pensions market. Insurers and trade bodies have so far made limited public comment, but the PRA is expected to consult further before any changes are finalized.
Even if funded reinsurance becomes less accessible, market participants expect the UK pension risk transfer market to continue, though possibly at a slower pace and with higher prices.
