Effective since January 2016 in the UK, Solvency II refers to the prudential framework that governs UK-regulated insurers and includes financial resources, governance, risk assessment and accountability.
The framework is one that originated in the EU. However, after Brexit, the UK government decided to move it across to UK law in order to make it appropriate and optimal for the UK market. Tested by Covid-19, the insurance industry has fared well through difficult times, but is seems improvements to the existing regulations may be required.
The age-old problem
As trustees, the Solvency II may not be something we consider directly on a regular basis, however, we do have an ageing population who need long term protection funds.
In 2022, trustees have new challenges to consider in setting a long-term strategy. Here at 20-20 Trustees, we have completed many risk transfer deals, which rely on a healthy and competitive insurance market under the right regulatory regime. Whether long-term strategy or short-term, the security of UK pension payments is reliant on the success and longevity of the insurance market.
In the Review of Solvency II consultation, the government stated a key goal is ‘is to ensure that the UK’s prudential regulatory regime is better tailored to reflect the particular structures, products and business models of the UK insurance sector and the wider UK regulatory approach.’ It says the reforms will help insurance firms ‘provide long-term capital to support growth’. Getting this review right is critical. Not only is this important for pension schemes, but it’s also vital for a sustainable future (as public money alone cannot fund the green transition).
Insurers concerned about holding capital
The Association of British Insurers say the current situation is working well and state the proposals in their current format would not in fact realize the proposed release of 10 to 15% of capital for re-investment. It argues that life insurance firms and most annuity writers would have to hold extra capital, and so would not be able to meet the key aim of funding investment across the UK. In fact, because insurers would have to hold more capital, the proposals would actually drive up costs to consumers and would penalize pension customers.
Insurers argue they are not exposed to the same systematic risks as banks, and that they can manage volatility. One view is that we must ensure proportionality with the aim of reducing the burden of regulation, operational complexity and burden. The current economic climate will also need to be taken into account.
The devil is in the detail
Currently, the proposed reforms are quite vague from a pension scheme de-risking perspective and, as always, the devil is in the detail and will no doubt vary from insurer to insurer.
Trustees who are currently contemplating de-risking transactions should think about the effect of the proposed changes on their selected insurer. We recommend that trustees should speak to their covenant advisers, and run appropriate due diligence on any insurer being considered. However, we don’t expect this advice to significantly change trustee plans to de-risk their schemes and protect their members’ benefits.
Overall, the policyholder will likely see very modest changes to security but having said that, we would expect any risks to be closely managed by the insurers. As things stand now, we do not expect trustees to change their journey plans, as we anticipate modest amendments to pricing (although larger transactions could obviously benefit from their economies of scale).
Our insurance colleagues believe the government could be missing a golden opportunity to tailor the insurance and long-term savings’ regulatory regime to the specific needs of the UK. For now, we will have to wait and see how the government responds to the consultation, along with any wider market and economic implications
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