Commenting on the launch of the government’s guide on investing in UK infrastructure assets this week, and what it means for insurers, Keith Goodby, Insurance Investment Advisory Group – UK Co-Lead at Towers Watson, said:
“The launch by Danny Alexander of the government’s guide to investing in UK infrastructure will be of welcome interest to UK life insurers, many of whom are potentially key in bridging the funding gap. The details of the 14 individual infrastructure projects worth £15bn open to investment and the £383bn Infrastructure Pipeline to 2020 will be viewed with interest by an industry keen to both support the UK economy and improve yields on their asset portfolios.
“However, there are some challenges to insurers investing in infrastructure. Most notably the recent pension reform announcements in the Budget, whereby individuals are no longer required to buy an annuity in retirement, came as a surprise to an industry that had previously made pledges to invest in infrastructure. Whilst a welcome reform from the point of view of flexibility in pensions solutions, annuities were the natural source of funding for infrastructure investments by insurers.”
Neil Chapman, a director of Towers Watson’s insurance consulting business, added: “Insurers are also grappling with the proposed Solvency II regulation, in particular eligibility for the Matching Adjustment which requires, amongst other things, certainty of cash flows from the underlying assets, in order to benefit from higher liability discount rates and consequentially lower reserves for annuity business. Unless there are suitable Spens clauses* in respect of prepayment options on these assets insurers are unlikely to be able to use them for the Matching Adjustment, which will have a significant impact on their attractiveness.
“There are also considerations of alignment with insurers’ desire for a long-dated tenor and low risk high yield assets; that is, assets with a strong credit rating and high yield. The UK Guarantees Scheme seeks to address the credit rating but most likely at the expense of some yield.
“Insurers may also want to avoid investment in projects that carry political and reputational risk, such as on-shore wind farms. Similarly, they may feel there are potentially long-term unknowns around investment in Scotland with the independence referendum in September.”
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