Losing momentum on Solvency II reforms would be a missed opportunity to transform Britain
This is a once in a generation opportunity. That phrase might have become a bit of a cliché, especially in recent years, but the UK’s exit from the EU could ensure that Solvency II reforms really are one of those events. The proposed reforms represent a very significant opportunity to ensure more private sector capital can be directed into the UK economy.
Only seven per cent of UK pension assets are diverted to other assets, like infrastructure, venture capital and real estate. The average amongst the world’s largest pension pots is 19 per cent. If we want to enable significant investment to where society and the planet needs it most, while also boosting returns for policyholders, we need to put this capital to work and we need to maintain momentum with the introduction of these reforms.
The opportunity now is to ensure that the regulatory environment enables pension savings to be invested responsibly in a broader range of assets for the benefit of retirees and wider society. In doing so, it would boost the UK economy, allow investment in vital infrastructure such as social housing, and support the UK in its transition to Net Zero. And critically, policyholder protection always remains the undisputed priority.
At Phoenix Group we see a clear opportunity to invest more in alternative assets. We could potentially invest up to £50 billion in productive and sustainable projects, but this will only be possible following regulatory change and if opportunities are available to us.
Solvency II reforms will be a critical step on this journey. Key to these reforms are the rules around the matching adjustment – using asset prices to assign a market-consistent value to insurers’ annuity liabilities, with strict controls on what assets can be recognised. We believe these controls should be more principle-based, flexible and pragmatic to ensure that our policyholders benefit from having access to a broader range of assets within a safe investment environment.
For the avoidance of doubt, we are not calling for a release in capital requirements. In fact, we expect the fundamental spread, another component of the matching adjustment calculation, will increase slightly above current prudent levels, further increasing reserves. The changes will allow the sector to allocate more of its assets away from non-productive assets such as corporate bonds into infrastructure, social housing and green technology. We fully expect greater investment flexibility to come with enhanced risk management to ensure policyholders continue to enjoy extremely high levels of protection.
Over the coming years, the public finances are going to be stretched regardless of who is in government. Private investment into infrastructure could help fill the gap and ensure capital is provided in key areas. This has the potential to benefit everyone. The UK economy will grow, connectivity, infrastructure and housing will improve, and this would help policyholders get a better return and a better retirement as a result.
Last year we invested more than £1 billion in a range of productive assets across the UK, including social housing, renewable energy production projects; and care homes, healthcare and university facilities.
With the right regulatory environment and more investment opportunities, we can do more. We need the transformational projects to come to market that will use our capital. That means we need national and local government working together to build the investment case that will improve our towns and cities, and set the country on a path to Net Zero.
We are on the right track, but must not lose this momentum if we want to put capital to work and enable investment potential where it is needed most.