PRA Review of Solvency II: Reform of the Matching Adjustment

Commenting on the ‘PRA Review of Solvency II: Reform of the Matching Adjustment’, Michael Abramson, Partner and Risk Transfer Specialist, Hymans Robertson says:

“Today’s regulations published by the PRA slightly expand the universe of suitable assets that insurers can use to back buy-ins and buy-out. In particular, the regulations provide some flexibility in respect of the so-called ‘matching adjustment’, which encourages insurers to invest in assets with cashflows that match their liabilities. This may provide a modest boost to insurer capacity as well as helping some pension schemes by making it easier for insurers to take on their existing assets as part of a buy-in or buy-out. However, pension schemes should manage their expectations as many illiquid assets held by schemes will still fall outside of the new insurer regulations.

“The publication of these regulations means that the first phase of the new Solvency UK framework is now largely complete, with any remaining details focussed on more operational aspects.”

Commenting on the release of 'Solvency II: Reform of the Matching Adjustment' final guidance, Nick Ford, Partner, Head of Risk & Capital says:

“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). 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. With around £50bn of funds transferring from pension funds to these insurers each year this has the potential to deliver some of the £100bn of extra investment sought by the UK government into productive and green finance.

“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. 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.”