- KPMG pensions team has advised on a third, or £1 billion, of this record volume of deals
- These unprecedented volumes are driven by favourable pricing conditions and increasing innovation in financing risk transfer deals and a fundamental desire by companies to start their withdrawal from the insurance business to concentrate on their core engineering and retailing skills as appropriate
- But the window of opportunity for buy-ins may not last. The “Solvency II” legislation due to take effect in January 2014 may make buy-ins harder for the insurance industry to price attractively, warns KPMG and the effects on pricing may be felt well before 2014
Favourable pricing conditions, increasing affordability and a fear that looming “Solvency II” regulations may make buy-ins more difficult and expensive have driven pensions buy-ins in the last 12 months, finds research from KPMG in the UK.
In the last year, over £3 billion of pensions liabilities have been transferred to the insurance market, according to KPMG who advised on £1 billion in risk transfer deals.
But the opportunity to de-risk in this way may not last much longer as the “Solvency II” insurance regulations, due to take effect in January 2014, may mean that these deals become much less affordable as a result of increased capital requirements for the insurers..
David Fripp, Pensions Partner at KPMG in Birmingham, commented: “The stars are currently aligned exceptionally favourably for pensions buy-in but this situation may not last.”
According to KPMG, these deal volumes are likely to continue to increase over the next year or so, driven by three main factors:
A combination of market conditions and market competition means that companies are currently able to negotiate extremely favourable pricing to de-risk their pensions liabilities and agree considerable flexibility in contract terms with insurers. Many deals involve a risk transfer for particular tranches or subsets of the pension liability rather than a one off deal for the total liability which can provide increased flexibility.
Increased “affordability” utilising non-cash financing
Some schemes are finding that they can agree in specie settlements for pensions liabilities with insurers. In these transactions, the buy-in can be part-financed by transferring actual assets rather than cash, subject to agreed valuation terms. In this way, a buy-in can be achieved at a lower cash cost than may have originally been envisaged. Company’s have supported buy-ins because it allows de-risking without an adverse impact on their profit and loss account and other metrics such as earnings per share.
A limited time window
New Solvency II regulations will come into force in January 2014 which may place increased capital requirements on insurers. The effect of this may well be to make pensions buy-ins a less commercially attractive proposition for many and the effects may be felt much earlier than the effective date of the new requirements. Companies looking to de-risk via a buy-in are therefore looking for their trustees to act quickly, before these new rules take effect.
David Fripp concluded: “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.”
For further information please contact:
Margot Cowhig, KPMG Corporate Communications
Tel: 0207 694 4246 Mobile: 07920 274856: firstname.lastname@example.org
KPMG Press Office: 0207 694 8773
Notes to editors
KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and operates from 22 offices across the UK with nearly 11,000 partners and staff. The UK firm recorded a turnover of £1.6 billion in the year ended September 2010. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. We operate in 150 countries and have more than 138,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. KPMG International provides no client services.