What can pension schemes learn from insurer profits?

What pension schemes can learn from the profits bulk annuity providers make – and why it matters for endgame planning

In 2024, UK BPA insurers paid close to £5bn in dividends, and wrote c£48bn of gross premiums – these are not small figures. And so, we often find that the profits that buy-in insurers generate can be a contentious topic when pension schemes are exploring endgame strategies. 

Questions commonly asked include: 

• Why should we hand over surplus to benefit insurer shareholders? 
• Why lock up assets in cautious portfolios and forgo potential future returns? 
• Does it really matter what insurers make if members are getting their benefits? 

Whilst important, these questions miss a key point.  

We suggest asking a different question - “What can pension schemes learn from insurer profits?” In this blog, we explain three different ways that understanding insurer profits can help trustees and sponsors make better-informed decisions:

1. Are you getting a fair price for your buy-in/buy-out quote? 
2. What is the right period for you to run on past the point of buy-out affordability?
3. How secure is insurance for your members?

1. Are you getting a fair price – and how would you know?

The problem is that no one – including the insurer(!) – knows how much profit will be made on a transaction at the point it is written. The profits we see published in insurer accounts are dependent on many subjective assumptions projected into the future and often relate to deals made years earlier in very different conditions. 

For our clients, the key is not trying to guess the final profit that the insurer will make on their transaction. Instead, it is testing whether they are paying more than is necessary. By leveraging LCP’s data on hundreds of transactions, investment expertise and insights from our health analytics team, we can give our clients a clear view of what a reasonable insurer margin looks like – and whether the quote they are given represents fair value.  

2. Should you run-on, and for how long?

When a scheme is running-on – for any reason – it faces the same core question an insurer does: how to balance delivering member security alongside generating a reasonable return on assets? By viewing risk like an insurer, trustees can set their own scheme’s risk appetite more deliberately:   

• What level of risk are we comfortable taking? This includes deciding how much buffer to hold to guard against downside risks, taking into account your scheme’s specific circumstances, the strength of your sponsor covenant and any contingent assets. This is comparable to how insurers manage risk by holding a capital buffer.    
• How do we maximise return for a given level of risk? Without insurance regulatory constraints, schemes may be able to access a broader range of assets. But unlocking higher returns requires more than availability – it demands robust governance, liquidity management, specialist expertise, and a clear understanding of the cost and complexity involved.  
• What level of “unrewarded” risk are we willing to accept? For example, at what point does it make sense to insure longevity risk? How do we manage market risks such as interest rate and inflation risks? Insurers generate profits through a carefully managed balance of risk and return. Schemes can do the same, provided they understand the trade-offs and costs involved. 

Once you’ve defined your appetite for risk and expected return, you can assess whether running on delivers better value than insuring for your unique circumstances – and for how long that approach remains appropriate. 

3. How do insurer profits relate to insurer security?

If insurance is likely to be part of your endgame then you will need to ensure you understand the risks associated with it. To really understand an insurer’s risk profile, you need to look beyond just the level of capital coverage an insurer offers today. Looking to insurers profits can be extremely informative in understanding the wider risk culture of an organisation. Generally, we are looking for insurers that can generate long-term stable profits which are used for the benefit of the business, their customers as well as their shareholders in a sustainable way. Considering approaches to investment, reinsurance, managing longevity and dividends are all vital context to understanding the counterparty you are considering transacting with.