KPMG has warned defined benefit (DB) pension schemes to complete insurance backed buy-ins before the European Union introduces its Solvency II insurance industry legislation in 2014, but another market expert has told Pension Funds Insider there is little need to panic

The market in the partial pension liability insurance known as buy-ins has been booming, reaching a record £3 billion over the past year. Increased competition, favourable market conditions and an improved financial position of many pension funds is acknowledged to have buoyed the market.

Despite the boom, David Fripp, pension partner at KPMG, said this week that "the stars are currently aligned exceptionally favourably for pensions buy-ins but this situation may not last." The audit, tax and advisory group, which has advised on some £1bn worth of buy-in deals in the last year, has raised the prospect that the EU's planned Solvency II legislation will make buy-ins more expensive if insurers are required to hold more capital reserves, as expected.

Fripp says that many businesses are looking to de-risk their pension liabilities and "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".

In contrast, Jay Shah, co-head of business organisation at the Pension Corporation told Pension Funds Insider that he was concerned about the possible consequences of Solvency II but not unduly worried that the booming buy-in and buyout market would be significantly affected.

Shah said that "Solvency II clearly hasn't settled down yet. There are several key aspects that are still subject to discussion and I am sure there will be a political outcome to the final picture."

Shah said: "There is plenty of uncertainty but having said that, you can form a view of what Solvency II might look like and we are already doing that when we price new business. We price in accordance with the current regulatory regime but also with an analysis of what it would look like under Solvency II."

He added that "There won't be a cliff-edge event, but the pressure on prices will almost certainly be upwards with more capital needing to be priced in. That information is already in the public domain; we are cognisant of it and are building it into our views and prices."

Referring to the recent release of Pension Corporation's latest affordability index, which shows that buyouts have maintained a strong rebound in pricing since the financial crisis, Shah says: "I completely agree that pricing is attractive at the moment. There is an extremely encouraging picture which has been driven by a recovery in the equity markets and long-term gilt yields."

Shah says acting at the right time in equity and gilt markets to complete a buy-in or buyout is therefore an issue of greater importance than Solvency II worries.

dbillingham@wilmington.co.uk

First published 27.07.2011