In this speech on Monday (21st February), John Glen said “…leaving the EU means that the UK can now tailor the prudential regulation of insurers to our unique circumstances”.
He highlighted that he expected “there to be a material capital release… possibly as much as 10% or even 15% of the capital currently held by life insurers” but that “the overall level of policyholder protection will remain very strong.”
He summarised the four areas of potential reform as:
• “a substantial reduction in the risk margin… including a cut of around 60-70% for long-term life insurers”.
• “a reassessment of the fundamental spread used to calculate the matching adjustment, in order to better reflect its sensitivity to credit risk”.
• “[to] introduce a significant increase in flexibility to allow more investment in long-term assets such as infrastructure” and
• “a major cut in the EU-derived regulations which make up the current reporting and administrative burden”.
Although the impact of these changes on insurers will depend on exactly how they are implemented, it is expected that they could improve capacity in the pension buy-out market.
Under the Pension Schemes Act 2021, all Defined Benefit pension schemes have to have a ‘long-term objective’ which for many schemes will involve ‘buying out’ their liabilities with an insurer. As a stepping-stone to that eventual destination, many schemes will partially insure their liabilities through a ‘buy-in’ of pensioner benefits. The volume of such transactions is expected to increase in coming years as pension schemes mature, but there have been concerns about the capacity of insurers to meet the volume of demand. The changes to the solvency rules could make it easier for insurers to raise capital and source assets enabling them to write greater volumes, improving the chances of DB pension schemes reaching buy-out.
It is not however expected that there will be a wholesale relaxation of rules, as regulators have to balance the desire to stimulate long-term investment with the desire to protect the interests of policyholders by ensuring that insurers hold sufficient capital to meet their liabilities.
Commenting, LCP partner Charlie Finch said: "It will be vitally important that the reforms prioritise policyholder security and ensure the UK insurance regime continues to be a safe, long-term home for peoples’ pensions. We believe both objectives can be achieved and look forward to seeing further details of the reforms.”
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