The Prudential Regulation Authority (PRA) has recently released the final guidance on the ‘Solvency II: matching adjustment‘, marking a significant milestone in the Solvency UK reform. This initiative aims to enable UK life insurers to allocate more of their assets into the productive economy, supporting the government’s objectives for increased investment in productive and green finance.
Increased investment flexibility
According to Nick Ford, partner and head of risk and capital risk at Hymans Robertson, “UK life insurers are now going to be able to invest more of their assets into the UK productive economy thanks to the rules just finalised by the Prudential Regulation Authority (PRA).” This regulatory change primarily impacts how insurers invest to secure the payments they will make to pensioners over the coming decades.
The technical component of Solvency UK reform
The guidance addresses the most technical component of the initial phase of Solvency UK reform. The reforms are significant as they govern the investment strategies of insurers, who manage around £50 billion of funds transferring from pension funds each year. Ford emphasised, “These deliver on the most technical component of the initial phase of Solvency UK reform which primarily impacts how insurers invest to secure the payments they will be making to pensioners for decades to come.”
Potential for increased investment
The final guidance is set to enhance the potential for increased investment in the UK economy. Ford highlighted the scale of the impact, stating, “With around £50 billion of funds transferring from pension funds to these insurers each year this has the potential to deliver some of the £100 billion of extra investment sought by the UK government into productive and green finance.”
Challenges and future reforms
Despite the increased flexibility, challenges remain. “Today’s announcement has confirmed that there will be increased flexibility in the type of assets that insurers can invest in. However, it will take time to significantly increase flows into these newly permitted assets and there will still be asset classes, such as some infrastructure funds that pension schemes currently hold, that they will find very challenging to include in their portfolios,” Ford noted.
In response to these challenges, insurers have proactively engaged with the PRA to suggest further reforms. Ford mentioned, “Expecting that, insurers have already engaged with the PRA to explore suggestions on further reform to accelerate these moves and deliver the extra investment that the government is seeking.”
The final guidance on ‘Solvency II: matching adjustment’ represents a crucial step in the Solvency UK reform. It aims to increase investment flexibility for UK life insurers, facilitating more significant contributions to the productive and green economy. However, as Ford pointed out, there are still hurdles to overcome, and ongoing dialogue between insurers and the PRA will be vital to fully realise the potential of these reforms.