The government’s recently announced proposed reforms to Solvency II could have a “significant impact” on activity in the pension buyout market, according to LCP.

Economic Secretary to the Treasury, John Glen, detailed the plans in a speech on 21 February, in which he stated that there could be a “material capital release” of up to 15 per cent of the capital currently held by life insurers, but that the overall level of policyholder protection would remain "very strong".

He highlighted four areas of potential reform: a “substantial” reduction in the risk margin, including a cut of around 60-70 per cent for long-term life insurers; a reassessment of the fundamental spread used to calculate the matching adjustment; the introduction of a “significant increase” in flexibility to enable more investment in long-term assets; and a “major cut” in the EU-derived regulations.

LCP stated that although the impact of the changes on insurers would depend on how they are implemented, it expected the reforms could improve capacity in the buyout market.

The consultancy noted the changes in rules could make it easier for insurers to raise capital and source assets, enabling them to write greater volumes of deals and improving the chances of defined benefit (DB) pension schemes reaching buyout.

However, LCP said that a wholesale relaxation of rules was not expected, as regulators have to balance the desire to stimulate long-term investment with the need to protect the interests of policyholders by ensuring that insurers hold sufficient capital to meet their liabilities.

“It will be vitally important that the reforms prioritise policyholder security and ensure the UK insurance regime continues to be a safe, long-term home for peoples’ pensions,” commented LCP partner, Charlie Finch.

“We believe both objectives can be achieved and look forward to seeing further details of the reforms.

“There is no doubt that demand from DB pension schemes to insure some or all of their liabilities could grow considerably. Our analysis projects volumes of up to £650bn over the next decade. But insurers are constrained by tough solvency rules which means capacity could fall short of rising demand making insurance less affordable.

“The proposed reforms to Solvency II have the potential to offer a boost to this market, increasing capacity and helping more pension schemes to reach their ultimate goal of buyout.

“It will be vitally important that the reforms prioritise policyholder security and ensure the UK insurance regime continues to be a safe, long-term home for peoples’ pensions. We believe both objectives can be achieved and look forward to seeing further details of the reforms.”

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