Solvency II will have a diminishing impact on the price of pension de-risking and eventually boost UK insurance companies’ appetite for deals by up to £5bn (€7bn), LCP has predicted.
Contrary to previous estimates by PwC that the price of buyouts could increase by up to 10%, the consultancy predicted the cost of passing on pensioner risk would remain broadly unchanged, while there would be an average increase of 3% when covering the risk of non-pensioner cohorts.
However, in its 2015 report on pensions de-risking, LCP said the increased price would vary depending on the insurance company and argued its impact would diminish as insurers modified their new capital requirement models.
The report went on to say that next year’s introduction of Solvency II brought several years of uncertainty to a close.
But it said that the “more favourable” outcome would help grow the UK de-risking market.
The buy-in and buyout market has, nevertheless, already exceeded £10bn this year, compared with £13.2bn of policies written in 2014.
The longevity swap market saw a notable decline, from £21.9bn to £9.3bn, but 2014’s figures were boosted by the BT Pension Scheme’s completing a £16bn deal, the single-largest de-risking deal in UK history.
LCP predicted a £5bn increase in insurance capacity in 2016, driven by the clarity created by Solvency II’s introduction but also by the entry of two new providers into the market.
Scottish Widows last month completed its first deal, a £400m buy-in for Wiggins Teape, while Canada Life in October announced details of its first, £5m deal.
Charlie Finch, a partner at LCP, said the increased level of competition would be beneficial to pricing in 2016.
He added: “All the ingredients are now in place for the market to break more records and provide cost-effective solutions to help pension plan trustees and companies transfer risk at affordable prices.”
But Finch said pension funds would need to compete for capacity with insurers transferring historic annuity business to other insurers.
“The delicate balance,” he said, “between supply and demand means that, despite the increase in insurer capacity, demand could quickly outpace supply, especially if investment markets improve pension plan funding levels.”