The negotiations broke down last week and leave Paternoster, headquartered in London with an actuarial team in India, unable to complete further bulk annuity deals until market conditions improve.
Chief executive Mark Wood said: “At some stage we will have to reduce our operating costs and obviously an element of this is going to be redundancies.”
The insurer has insufficient capital to write fresh deals after making conservative provisions against losses from its corporate bond portfolio last year.
The previously bullish firm has become gloomier in recent months and now expects very few bulk annuity deals to be written for at least a year.
Paternoster is returning its licence to conduct bulk annuity business to the Financial Services Authority until the outlook improves.
But some independent consultants doubt the insurer will be able to return to the fore after the hiatus.
However, it is understood that there is no question of Paternoster being unable to continue paying the benefits to around 100,000 pensioners.
Paternoster manages £2.7bn in assets and has won high profile bulk annuity deals with the P&O, Powell Duffryn and Emap pension schemes since its inception in 2006.
The largest of its 10 institutional investors, hedge fund Eton Park and Deutsche Bank, control 50% of the insurer.
Wood said: “Even if we raised £500m from them tomorrow, I don’t think we would be able to write sufficient business with it due to market conditions.”
Paternoster’s rivals, including Prudential, Legal & General and Lucida, concede there is less demand for bulk deals than last year but remain optimistic.
