Solvency II, the European Union's long-awaited capital requirements for insurers, is starting to play out in the already contentious area of pension funding.

The rules took effect Jan. 1, and their effect on bulk annuities, a mainstay of pension funding where insurers write annuities to cover the retirement income of a group of retirees, remains to be seen, particularly with employers looking for ways to reduce such liabilities on their balance sheets.

Experts say the rules on treatment of such long-term guarantees may encourage insurers to hedge more longevity risk than previously, but they expect interest in bulk annuity deals to continue.

“Fitch Ratings Ltd. expects the bulk (annuity) market to grow significantly in the next five years, despite higher costs due to low interest rates and Solvency II capital requirements,” Fitch analysts Sam Mageed and David Prowse said in a report last month.

Shelly Beard, London-based senior de-risking consultant at Willis Towers Watson P.L.C., said that buy-in and buyout activity likely will increase in 2016 as longevity risk increases in importance for pension plans.

Ms. Beard said Willis Towers Watson estimates that more than £10 billion ($14.23 billion) of pension liabilities were transferred to the insurance market through buy-ins or buyouts in 2015.

While some insurers have taken time to “bed in” Solvency II to their models, and while the new rules have led to a some testing out new pricing structures for deals, Willis Towers Watson already has seen a high level of interest in the first part of this year, she said.

Insurers' interest in bulk annuities stems in part from a desire to offset lower individual annuity sales prompted by 2015 changes in U.K. law that no longer require retirees to buy an annuity with their pension savings, experts say.

While Solvency II raises the longevity capital requirements on insurers that write bulk annuity business, those requirements can be eased by reinsuring longevity risk, Fitch said.

Last year was a busy time for bulk annuity deals, as insurers pushed deals forward before Solvency II was implemented, according to a report by Ms. Beard and Ian Aley, head of transactions at Willis Towers Watson in London.

Working ahead also gave insurers time to digest the Solvency II rules, obtain regulatory approval for any changes to their business models and establish their pricing structures, among other things, Aon Hewitt said in its January 2016 U.K. Risk Settlement Bulk Annuity Monitor.

“Whilst we do not expect to see a material change in the best available pricing for pensioners as a result of Solvency II, there could well be an increase in cost for bulk annuities covering members who have not yet retired,” the report stated.

For pension plans looking to secure an actuarial valuation including their buyout funding position, it will therefore be important to determine whether allowance has been made for Solvency II, Aon Hewitt said.

Many insurers spent the latter half of 2015 preparing for Solvency II, but the final details on reserve requirements under the new rules were not provided by the U.K. regulator, the Prudential Regulation Authority, until December.

Treatment of long-term guarantees was one of the things that delayed implementation of Solvency II to Jan. 1. A proposed start date of 2014 was delayed while legislators finalized the treatment of long-term guarantees.

“This means that as insurers start to submit responses to quotation processes in early 2016, there will inevitably be a period of price discovery for both pension schemes and insurers, as the market looks to understand how different players have been affected by the new reserving rules,” Willis Towers Watson's Mr. Aley and Ms. Beard said in the report.

Activity is likely to pick up in the spring, they noted.

Once there is clarity on the effect of Solvency II, there likely will be an increase in insurer capacity for bulk annuity deals and renewed management focus and risk appetite, London-based accountancy firm Lane, Clark & Peacock L.L.P. said in a report.

“Solvency II also encourages insurers to hedge more longevity risk than before,” LCP noted.

This likely will result in insurers buying more longevity reinsurance and increased competition for reinsurer capacity for longevity swaps with pension plans, and insurers making more use of reinsurance as part of pension buyout or buy-in deals, it said.

London-based life insurer Prudential P.L.C. is not waiting for the shakeout. Nic Nicandrou, chief financial officer, told investors last month that it will reduce the amount of U.K. annuity business it underwrites because it believes Solvency II requirements would make it more difficult to generate attractive returns.

He said a lot of financial engineering would be required to make the sale of bulk annuities — in which Prudential has been a major player — work under Solvency II's capital constraints.

Prudential wouldn't comment further on the topic.