A KPMG research has revealed British businesses transferred a record £3 billion worth pension liabilities over the last 12 months through pension buy-ins.
The KPMG report forecasts an increase in deal volume over the next 12 months citing favourable pricing, a limited time window before Solvency II norms roll in and increased affordability due to availability of non-cash financing.
However, the opportunity to de-risk may not last longer for businesses as Solvency II would require insurers to make higher capital requirements, making these deals unaffordable for insurers, the report warned.
David Fripp, pensions partner at KPMG said: “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.”
A combination of tough competition among pension providers and favourable market conditions has allowed companies to negotiate extremely favourable conditions to de-risk their balance sheets by transferring pension liabilities with insurers.
Many deals in recent times have given companies greater flexibility since they involve risk transfer for particular tranches of maturing pension liabilities rather than an isolated deal for total liability.
Some pension schemes have found that subject to agreed valuation terms, they can agree to in-specie settlements with insurers for liabilities thorough which buy-ins can be part financed by actual assets rather than cash. This actually frees up cash as a buy-in can be achieved at lower cash than estimated.
The companies have been supportive of buy-ins since it does not affect the income statement and other performance metrics such as earnings per share and PE multiples.
KPMG warned that the effects of Solvency II requirements may be felt much earlier than the effective date and advised companies to act quickly if they are planning to de-risk pension liabilities through buy-ins.