PRA - Reforms to the Matching Adjustment
In June 2024 the PRA the Prudential Regulation Authority (PRA) published its policy statement PS10/24 on reforms to the Matching Adjustment (MA). This provided feedback to responses received to the PRA related consultation and details of the final policy and changes to rules. The final policy will come into force on 30 June 2024.
More details can be found here.
Financial Services and Marketing Bill
The Financial Services and Marketing Bill (FSMB), which received Royal Assent on 29 June 2023, enables matching adjustments to be based upon highly predictable returns. However, the examples of this, given in the Government’s response to its consultation in November 2022 (see below), related to infrastructure; AREF, BPF and IPF have been lobbying HM Treasury and PRA on the inclusion of real estate investments within the matching adjustment.
Government response to consultation
In November 2022, the Government published the response to its consultation on reforming Solvency II in the UK. As well as summarising the responses received to the consultation, the paper set out the Government’s final reform package, and outlined the plans for implementing it.
AREF, along with other real estate related trade bodies, will keep lobbying the Government on the proposals mentioned in our response to the consultation (see below). Also, we will explore the kind of property investments that would be appropriate for inclusion within a broadened set of matching adjustment eligibility criteria.
Consultation
On 21 July 2022, AREF submitted its response to the Government's consultation on reforming Solvency II in the UK; the framework governing the prudential regulation of UK insurers. A key aim of the Government's proposed reforms is to enable the UK’s insurance industry to invest more in long-term illiquid assets such as real estate and infrastructure.
AREF joined an informal working group of trade bodies, representing the real estate, funds and insurance sectors, to review the consultation from a real estate point of view. The working group agreed on the following proposals which AREF included in its response:
- The SCR charge for property risk should be reduced from 25% to 10%.
- The Long-Term Equity (LTE) provisions should only apply to life insurance companies.
- Life insurers should be able to decide on a case-by-case basis whether a fund should be regarded as property (real estate fund) or long-term equity (private equity fund).
- Some long-lease real estate investments should be eligible to fall within an expanded matching adjustment.
- HM Treasury should look holistically at the costs and benefits of the Solvency II regime generally.
AREF’s Public Policy Committee will continue to monitor the UK's reforms for Solvency II.
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