LONDON, April 27 (Reuters) – The Bank of England warned insurers on Thursday not over extend themselves in grabbing more business from pension schemes eager to offload risks.

Charlotte Gerken, executive director for insurance supervision at the Bank, said that in the face of considerable temptation to capture business opportunities, insurers need to exercise caution.

Bulk purchase annuities (BPA) are long-term policies from life insurers for company defined benefit, or final salary, pension schemes.

Rising interest rates have improved funding levels of pension schemes, making them cheaper to offload to an insurer and Gerken said industry is preparing itself for record levels of transfers.

“As deals become larger and increasingly focussed on buy-outs of complete schemes, we observe BPA writers expanding their risk appetite, sometimes outside their current core expertise,” Gerken said in a speech.

Insurers may be tempted to stretch their capabilities in the short term before leaner years arrive, Gerken said.

UK life insurers could take on more than 500 billion pounds ($623.70 billion) of pension liabilities over the coming decade, she said.

“This is a big structural change in the control of long-term investments in the UK, and the decisions that insurers make now will have long term consequences for the performance and development of the broader economy,” Gerken said.

The Bank had to buy UK government bonds last September after liability-driven investment (LDI) funds used by pension schemes struggled to find enough liquidity to pay collateral on rocketing gilt yields.

Insurers will need to hedge their pension risks with interest rate, cross currency and inflation swaps, increasing the sector’s links to the wider financial system, Gerken said.

“Insurers therefore need to understand, as they take on these vast sums of assets and liabilities, how they may become greater sources or amplifiers of liquidity risk,” Gerken said.

($1 = 0.8017 pounds)

Reporting by Huw Jones
Editing by Alexandra Hudson

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