Caveats to life insurance stress test results, pension trustees told

Under the stress test, 11 life insurers’ resilience against a “severe but plausible” scenario in which there was a decline in risk-free interest rates, falls in equity and property prices, and widening spreads and subsequent defaults and downgrades, was tested. On Monday, the PRA published the “headline sector results” of the exercise, which it said were indicative of a market resilient to the core scenario it tested.

The 11 insurers subject to LIST 2025 are active in the bulk purchase annuity market and account for more than 90% of bulk annuity liabilities in the UK. Matthew de Ferrars and Dan Naylor of Pinsent Masons said the individualised results from LIST 2025, due to be published by the PRA on 24 November, could be informative for trustees seeking to transfer the risk of managing their schemes to an insurer – but cautioned against reading too much into them.

Matthew de Ferrars said: “When selecting a bulk annuity insurer to partner with, pension scheme trustees will make an assessment of insurers’ financial strength and resilience. The main focus of this has often been on the overall strength of the UK insurer capital and solvency regime. Now that we are shortly going to get insurer-level results from the PRA’s LIST 2025, the question is whether that focus will change to making a more in-depth comparison between insurers.”

“However, given that the scenario used for the LIST 2025 was only a single scenario and very sensitive to the variety of ways different insurers invest, there is a danger of overly simplistic comparisons between insurers being drawn,” he said.

Dan Naylor added: “It may be right for trustees to continue to focus on the strength of the regime as a whole and the assurance provided by the industry-wide level results of the LIST 2025 – which have shown that the sector as a whole is resilient to the severe financial market stress scenario it has been tested against.”