The refresh of the Solvency II rules will make certain assets more attractive to insurers. This includes infrastructure assets in their construction phase and higher risk assets common in “greenfield” projects that typically bear high technological and development risks.

The research outlines the opportunities and potential implementation challenges of broadening the matching adjustment (MA) asset eligibility criteria. Firms will need to focus on key aspects of risk management to protect policyholder security, such as maintenance of the matching between asset and liability cash flows and the approach to lower rated assets.

The publication of this research is well timed, given the increasing number of pension schemes approaching the insurance sector and the proposed reforms to attract pension assets to higher growth companies and deal with the fragmented Defined Benefit (DB) pensions market. The “Mansion House reforms” announced by the Chancellor, Jeremy Hunt, last week are proposed to boost the UK economy by channelling pension savings towards potentially higher growth, illiquid assets, and pushing smaller funds to consolidate in the hope this will make them more efficient.

The Chancellor’s announcement covered the Government’s proposal to introduce a permanent “Superfund” regime, for the consolidation of DB pension schemes, and allowing a separation from the sponsor, in much the same way as insurance. Care will be needed to ensure that these two regimes are not seen as in competition with each other.

Together, these changes have the potential to boost investment in the UK economy, but will require careful implementation and management of risks.

Alex Bertolotti, Leader of Insurance at PwC UK, said: “The proposed Solvency II reforms and those laid out in the Mansion House address are clearly a positive step that sees us well on the way to ensuring that we have a package that provides additional investment in the UK.

“When fully implemented we could see the opportunity for billions of investment fuelling the economy and propelling levelling up.

“However our deep analysis into the embedding of Solvency II shows the associated risk management challenges.

“Similarly, a permanent “Superfund” regime will require care to ensure that risks are appropriately managed and mitigated. It is five years since Superfunds were first mooted, and clarity on how they will operate and be regulated is paramount to achieve the objectives of improving member outcomes, whilst attracting investment into the wider economy.

“Creative ways to accelerate growth must be championed, however as our research shows it pays to consider how any additional risks can be monitored and managed.”

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