On 28 September 2023 the Prudential Regulation Authority (PRA) published a consultation (Consultation paper 19/23) on reforms to the Matching Adjustment (MA). This is part of a package of measures in relation to reforming Solvency II in the UK. The aim of the MA reforms is to improve the flexibility for life insurers to make more productive, long term investments in the UK economy while supporting safety and soundness and policyholder protection.
With the assistance of AREF's Public Policy Committee, AREF submitted a joint response to the consultation with BPF, INREV and IPF on 5 January 2024. We welcomed the policy change to widen the range of assets eligible for the Matching Adjustment through allowing investment in assets with highly predictable cash flows rather than just fixed cash flows. We were not in a position to comment in detail on the proposals in the consultation. However, we raised our concerns with the complexity of the rules proposed by the PRA and the increased Fundamental Spread. Also, we believed that the requirement for third party attestation would make the regime unattractive, thus undermining the policy objective of widening the range of eligible assets. We felt that this would defeat the government’s broader objective of encouraging investment by insurers in infrastructure, housing and urban regeneration.
We shared with the PRA, again, the paper AREF, BPF, INREV and IPF had jointly submitted to HM Treasury in 2023, setting out the importance of investment in real estate within the Matching Adjustment.
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