This month’s Bond Voyage looks at the Bulk Purchase Annuity (BPA) market in the UK – the quiet market making loud moves.
Read this article to understand:
- The Bulk Purchase Annuity (BPA) market in the UK and why activity has accelerated in this market
- Recent regulatory developments affecting the market
- The impact of BPA increased activity on credit markets
The expanding Bulk Purchase Annuity (BPA) market is undergoing a transformation that is reshaping its impact on credit markets and capital flows.
What is the BPA market?
Defined benefit (DB) pension schemes promise retirement income to members, funded by employer contributions and investment returns. These liabilities stay on the employer’s balance sheets, along with the associated longevity and investment risk of the payouts.
BPA transactions allow schemes to transfer some or all of these liabilities to insurers, who assume responsibility for paying pensions in exchange for a premium funded by the scheme’s assets. This delivers certainty for members, while reducing risks for employers (sponsors of the scheme).
Why is BPA activity accelerating?
Several structural and cyclical factors are currently driving record volumes of transactions in this market including:
- Improved funding levels at DB pension schemes: Higher interest rates since 2022 have boosted funding ratios by reducing the present value of liabilities.
- Competitive pricing: The entry of more insurers into the market has intensified competition, leading to sharper pricing and increased choices for all schemes.
- Risk management: Trustees are increasingly focused on removing pension‑related risks for both corporate sponsors and themselves.
UK BPA volumes exceeded £47 billion in 2024 (see Figure 1), spanning mega deals worth billions and a surge in smaller transactions. Beyond de‑risking, these deals channel billions into productive investments such as infrastructure and renewable energy, reinforcing BPA’s role in financial stability and economic growth.
Figure 1: Transaction volumes have surged in the BPA market
Source: Aviva Investors, Lane Clark & Peacock LLP. Data as of May 2025.1
The regulatory backbone
The BPA market operates under the Prudential Regulation Authority and Solvency UK (adapted from the European Solvency II regulation), which dictate how insurers manage risk and capital. A key mechanism is matching adjustment (MA), which reflects the expected return above the risk-free rate (after accounting for risk) and allows insurers to adjust the discount rate used for calculating long-term liabilities. This framework requires close matching between expected cashflows from the insurer’s investment portfolio and their expected liability cash flows.
New developments in regulations aim to introduce more flexibility for insurers
New developments in regulations aim to introduce more flexibility for insurers while maintaining the protection for policyholders. Key changes include a significant reduction in the extra buffer insurers hold to cover uncertainties in their liabilities through reforms to the calculation of the risk margin, broader eligibility for assets within MA portfolios, and streamlined approval processes.
Investment within these regulations requires insurers to run buy-and-maintain credit strategies, which balance investment in bonds with attractive risk-adjusted credit spreads with resilience.
These strategies prioritise diversification, management of ‘downgrade’ risk including avoiding defaults, and liquidity planning to avoid solvency strain during stress. However, tight credit spreads make sourcing assets at required risk-adjusted credit spread levels challenging, squeezing margins and intensifying demand for suitable investments.
Market impacts
BPA investing is influencing credit markets in a variety of ways:
- Shifting issuers’ strategies: Insurers’ preference for long‑duration, predictable cash flows is prompting issuers to structure bonds with extended maturities, fixed coupons, and simplified covenant packages to meet the regulatory criteria for assets. Additionally, this increased demand also gives issuers the opportunity to explore their options regarding funding strategies. This can mean greater issuance within the private credit space, potentially at the expense of syndicated issuance volumes, reducing the supply of public corporate bonds.
- Growing appetite for private assets: Private credit, infrastructure debt, and real estate offer illiquidity premia and long‑term cash flows aligned with insurers’ liabilities. Regulatory flexibility has accelerated the adoption of these types of assets, making private markets a core component of BPA investment strategies, driving innovation in deal structuring and increased demand for the assets. This results in a greater proportion of BPA investment flowing into private credit, which previously would have flowed into the public credit market.
- Increased non‑sterling demand: Domestic primary issuance has slowed sharply this year, limiting the supply of sterling denominated bonds. This has led insurers to source a greater amount of assets from the euro and dollar markets and hedge back to sterling using cross‑currency swaps. This increase in BPA demand for non-sterling issuance tends to tighten spreads in the primary markets but also dampens turnover in the secondary markets.
- Buying into volatility: Insurers’ long‑term horizon and deep credit research capabilities mean they can be better insulated from market noise. With cash ready to put to work, this allows insurers to act decisively during episodes of spread widening to capture the premia that others overlook. While this stabilises the markets, it concentrates liquidity in stronger credits. Although, when credit spreads compress, it can prompt insurers to reallocate to sovereigns for liquidity and capital efficiency. This reduces buy-and-maintain flows into corporate credit, decreasing the impact of a stabilising, long-term investor base.
While the BPA market may appear slightly removed from most institutional investors, its influence on asset classes and capital allocation is anything but.
Investors must navigate tighter spreads and shifting supply to source resilient and efficient assets
As insurers continue to scale their balance sheets and optimise risk-adjusted returns, their demand patterns will shape issuance trends, liquidity dynamics, and pricing across public and private credit. For investors, this creates both challenges and opportunities as they navigate tighter spreads and shifting supply to source resilient and efficient assets.
Ultimately, understanding the interplay between pension risk transfer and credit markets can support the positioning of portfolios and help drive sustained returns in an increasingly interconnected financial ecosystem.
