Bulk Annuities Market
Following interest rate hikes in 2023 and 2024, many UK defined benefit pension schemes (DB schemes) find themselves in significant surplus. According to PwC’s Buyout Index, the UK’s 5,000 plus corporate BD schemes, were £95bn in surplus at the end of June 2025. As a result, many DB schemes are considering buyouts and competition in the bulk annuity market continues to be strong.
Longevity swaps
Guernsey has played a role in this sector by intermediating several longevity swaps for DB schemes over the last 14 years. The 17 longevity swaps transacted in Guernsey to date follow a similar structure. The DB scheme establishes a Guernsey-licensed special purpose vehicle insurance company (SPV). The SPV insures the longevity exposure of the DB scheme to its members and then reinsures those liabilities with a reinsurer. The SPV does not retain any net risk.
Each of the counterparties in the transaction is exposed to the credit risk of each of the others. If the reinsurer becomes insolvent, claims due to the SPV may not be paid and in turn, the SPV will be unable to pay the DB scheme. This risk is particularly important because of the long duration of the transaction. It can be decades before the DB scheme’s liabilities are completely run off. To protect against this, longevity transactions invariably include extensive security and collateral arrangements.
Pension funds: hedging longevity risk
Incorporated cells
Incorporated cells have been used as SPV’s in all longevity transactions structured through Guernsey to date.
An incorporated cell is a company with its own memorandum and articles of incorporation, its own registration number and its own board of directors. Each incorporated cell is associated with a specific incorporated cell company. One of the directors of each incorporated cell must also be a director of the incorporated cell company. In addition, the registered office of the incorporated cell must be the same as that of the incorporated cell company, and the incorporated cell company is responsible for various administrative acts of each of its incorporated cells.
Forming an incorporated cell company is a cost-effective way of establishing a group of SPV insurers. Once a DB scheme has established an incorporated cell company and an incorporated cell to complete its first longevity risk transaction, it can easily add additional incorporated cells at a later date to enter into further transactions.
Incorporated cells can be transferred between incorporated cell companies, converted into standalone non-cellular companies or migrated to other jurisdictions. This means that the structure can be changed in the future if needed. This is important since, as noted above, a transaction can subsist for a very long time, perhaps in excess of 60 years.
Regulatory regime
Insurers in Guernsey are regulated under the Insurance Business (Bailiwick of Guernsey) Law, 2002, which requires all insurers, including those structured as SPVs, to obtain and maintain a licence from the Guernsey Financial Services Commission. Licensed insurers are subject to statutory capital and solvency requirements. These include a formula-based Minimum Capital Requirement (MCR) and a risk-based Prescribed Capital Requirement (PCR).
However, an incorporated cell used in a longevity risk transfer transaction can qualify as a special purpose entity for regulatory purposes (known as a “category 6 insurer”). This is because its underwriting risk and counterparty credit risk are both effectively eliminated by (in the case of its underwriting risk) the back-to-back reinsurance with the life reinsurer and (in the case of its counterparty credit risk) the collateral and security arrangements mentioned above.
Classification as a special purpose entity means that the incorporated cell does not need to meet either MCR or the PCR. It also does not need to produce an Own Capital Solvency Calculation (OSCA). The OSCA is similar in concept to the UK’s Individual Capital Assessment for insurers.
The Guernsey Financial Services Commission will also waive certain other requirements which would otherwise apply to the incorporated cell: in particular, the requirements to appoint an actuary to prepare an annual report; maintain minimum capital of £250,000; and hold assets representing 90% of policyholder liabilities in trust in Guernsey.
Pension funds: hedging longevity risk
Management
Instead of employing staff to manage the incorporated cell, the shareholder (the DB scheme) will usually appoint a non-executive board of directors supported by a locally licensed insurance manager. The insurance manager provides administrative services and technical insurance support. It also provides a registered office address and acts as the incorporated cell’s general representative.
Board meetings are held in Guernsey and the majority of directors are Guernsey residents in order to ensure that the mind, management and control of the incorporated cell remain, at all times, in Guernsey.
ICC facilities
Several Guernsey insurance managers have established their own incorporated cell companies to facilitate longevity risk transfer transactions for their clients.
These managers can offer pension funds an incorporated cell in a ready-made incorporated cell company. These incorporated cell companies may have incorporated cells owned by different pension funds, each of which is established to operate a single longevity risk transfer transaction. This structure can be cost-effective for pension trustees who are contemplating one-off or smaller transactions; and who therefore do not wish to establish their own incorporated cell company.
Guernsey transactions
Guernsey has an extensive track record in hosting longevity risk transfer transactions beginning with the BT Pension Scheme in 2014, as set out below.
- BT (2014) - £16 billion
- Merchant Navy Officers (2015) - £1.5 billion
- British Airways (2017) - £1.6 billion
- Marsh & McLennan UK (2017) - £3.4 billion
- EU Industrial Conglomerate (2018) - £2.3 billion
- Willis (2020) - £1 billion
- Financial services firm A (2020) - in excess of £2 billion
- Financial services firm B (2020) - in excess of £2 billion
- International Industrial (2021) - in excess of £3 billion
- Financial services firm (2021) - in excess of £3 billion
- Financial services firm (2022) - in excess of £3 billion
- Marsh & McLennan (2023) - £2 billion
- Merchant Navy Ratings Pension Fund (2024) - £450 million
- Communication services firm (2023) - in excess of £5 billion
- Communication services firm (2025) - £5 billion
- Media Firm (2025) - £1.7 billion (x2 transactions)
Captive assisted buy-in
In November 2024, Guernsey hosted its first ever captive assisted buy-in. The transaction involved the issue of a £500 million Bulk Purchase Annuity contract (BPA) by the Prudential Assurance Company Limited (PAC) to a UK DB scheme trustee.
The corporate sponsor to the DB scheme established a Guernsey licensed reinsurance company which reinsured a portion of PAC’s exposure under the BPA. This enabled the corporate sponsor to maintain an interest in any potential profits as well as any downside risk associated with the buy-in transaction. The transaction was the first of its kind to be completed under M&G’s value share bulk purchase annuity proposition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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