Consultation on reforms to the UK's Solvency II regime

At the end of April 2022, HM Treasury published its much-anticipated consultation paper on reforming aspects of the UK’s Solvency II regime, which governs the capital resources insurers must have to back the risks they insure.  The reforms are of interest to UK pensions, especially sponsoring employers and trustees of defined benefit (DB) pension schemes, as changes to the capital requirements may impact favourably on the availability and cost of annuities.

The Treasury’s consultation paper sets out proposed reforms, including a reduction in the risk margin for long-term life insurers, and changes to the matching adjustment (including broadening the range of eligible assets/liabilities), internal model framework, capital requirements for foreign insurers, threshold requirements and calculation of consolidated group capital requirements.  The government also intends to amend legislation to enable the PRA to introduce a new “mobilisation regime” to encourage new insurers to enter the market.  The government has noted criticism of the UK’s lengthy and burdensome authorisation process and it hopes that with lower regulatory requirements (but with proportionate restrictions on the firm’s activities), new entrants will find the UK a more welcoming regulatory environment. 

The government’s main headline is that efforts to reduce the risk margin has the potential for the release of “possibly as much as 10% or even 15% of the capital held by life insurers”. The government wants to see this extra capital used to support its wider economic, ESG targets.

Alongside the Treasury consultation, the Prudential Regulation Authority (PRA) published a statement setting out its views on key aspects of the proposed reforms and giving broad support for the Treasury’s proposals.  The accompanying Discussion Paper (DP2/22 – Potential Reforms to Risk Margin and Matching Adjustment within Solvency II), which will be of particular relevance to annuity providers, sets out the PRA’s current views on reform of the risk margin and matching adjustment (including the fundamental spread) and the impact of reforms on overall capital levels, safety and soundness and investments. 

HM Treasury and the PRA have both given a 12-week consultation period with deadlines for responses of 21 July 2022.

 

 

Authored by the Pensions Team. 

 

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