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The UK economy has a productivity problem, a retirement affordability problem, and an acute need to finance climate solutions. A more agile regulatory regime could unlock the innovative investment needed to deliver growth, transition to a net zero economy and achieve better outcomes for pensioners. We have proposed the introduction of a “Matching Adjustment sandbox”, targeted at facilitating more flexible and innovative investments in annuity funds. A mechanism such as the sandbox is one tool which regulators and industry could use to ensure the regime keeps pace with market developments.
The fundamental principle behind the sandbox proposal is prudent curiosity.
Solvency UK aims to make the insurance regulatory regime a better fit for the UK market. Parliament has already legislated to relax the requirements around which assets qualify for Matching Adjustment (MA) - a mechanism which allows insurers to recognise, through lower capital requirements, the reduced risk exposure for qualifying assets where the income on those assets is closely matched to the pension payments to customers.
The sandbox would be designed as a framework to allow insurers and the regulator to safely investigate expanding the range of assets that could be included in MA funds. This would utilise new PRA powers to review rules based on what assets would boost growth and/or sustainability but are currently disallowed.
The MA sandbox would establish a formal process for the PRA and insurers to engage on assets that:
Stage 1: Firms could voluntarily apply to the PRA for a time-bound waiver to invest a limited amount in a specific asset which would ordinarily not be allowed in the MA fund. A temporary regulatory treatment for the asset would be agreed before the PRA accepts this application to enter the sandbox.
Stage 2: Once in the sandbox, the PRA would examine the asset in-depth, and engage with the firm on potential regulatory treatment of the asset. At the end of the sandbox phase, the PRA would publish the outcome of their investigation.
Stage 3: If successful, during the execution phase the PRA would consult on amended MA rules to allow the investment. Following the consultation, the PRA would publish revised rules to allow any MA fund to invest.
The proposal provides flexibility to investigate any assets that meet government legislation, but not current insurance regulations. Assets which would provide the greatest economic or sustainability benefit could be prioritised, subject to ensuring that customer protection is maintained at all times. The amount of time in the sandbox would vary depending on the complexity of the asset under investigation.
While a PRA consultation on the framework would be required, we believe a sandbox could be operational by 2025, aligning to the new Solvency UK regime. We hope to stimulate dialogue within the industry and with policymakers, to ensure the Solvency UK regime is dynamic and responsive to the UK’s investment needs in the future.
