(July 25, 2011) – A record £3 billion ($4.9 billion) of pension liabilities were transferred to the insurance market through pension buy-ins over the past 12 months, KPMG has reported.
There were two factors that contributed to the unprecedented level of buy-ins, according to KPMG. The first is a set of market conditions – including innovative financing for risk transfer deals and favorable price conditions – that have made buy-ins more affordable for companies. Additionally, companies have been able to transfer particular subsets and tranches of the pension liability, which lends far more flexibility than traditional deals, which involved the entire liability.
The second factor that has driven the increase in buy-ins in the past year is the impending implementation of the European Union’s Solvency II, a new set of capital requirements. Hector Sants, CEO of the Financial Services Authority in the UK, describes Solvency II as “Facilitating a step change in the solvency and risk management of insurance firms in a consistent and transparent way across Europe.” The main effect that the new policy will have on the insurance industry is increased capital requirements.
These increased requirements will make pension buy-ins “less commercially attractive,” according to KPMG. With Solvency II implementations scheduled for January 2014, companies are taking advantage of today’s conditions. According to David Frippe, a Pensions Partner at KPMG, “The stars are currently aligned exceptionally favourably for pensions buy-in but this situation may not last…Many businesses looking to de-risk their pensions liabilities are hurrying to take advantage of the favourable pricing currently available and the opportunities to fund buy-ins with existing business and non-cash assets to get deals done quickly before Solvency II impacts are felt.”
Earlier this month, aiCIO reported on an Aon Hewitt study, which revealed that the top priority for European pension funds was de-risking. The study focused on different asset classes that pension directors were exploring to help hedge against risk; buy-ins represent another way to de-risk that was not covered in the study.
Although Solvency II is not set to be implemented until 2014, its effect on pricing may be felt well before that date, according to KPMG. As a result, companies pursuing a buy-in as a de-risking option will look to act quickly to take advantage of the favorable market.
By Justin Mundt
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