Post-Brexit Solvency II reform an opportunity to free up capital

Dr Kay Swinburne, chair of financial services at KPMG and former Conservative party member of the European parliament, told an Association of British Insurers webinar that the Solvency II legislation, which sets rules around capital requirements as well as determining what pension schemes can and cannot invest in, “never worked for the UK”.

She said that a number of measures that would have benefited the UK’s insurance and pensions sectors, such as exemptions from punitive capital charges for long-term assets, did not make it into the final version of Solvency II.

This harms the UK because it has “a very different attitude towards long-term investments than the rest of the EU”, Swinburne suggested.

Unlike the EU, the UK also has “a very large pre-funded pension fund sector”, she added.

With the government now pursuing its “levelling-up” agenda, Brexit, and the current “low interest rate environment”, there is an opportunity for divergence from EU Solvency II standards that could “really free up that capital to get it to work”, she said.

There have been a number of calls recently for pension schemes to play a more active role in financing the post-Covid economic recovery. Bank of England governor Andrew Bailey, for instance, has argued for a change in regulations to allow defined contribution pots to be used to invest in the “build back better” agenda.

Speaking at the same ABI investment conference webinar, Tracy Blackwell, chief executive of the Pension Insurance Corporation, agreed that Solvency II reform would be welcome, and suggested that the UK could be a “trailblazer” in leading it.

Allianz chief executive and ABI chair Jon Dye stressed, however, that reform should not extend to replace Solvency II.

“There’s a potential big win here in terms of the industry being able to support the investment that the country needs,” he said, but “nobody wants to get rid of Solvency II altogether”.

“Creating it was a massive and very expensive endeavour, and nobody wants to go around that track again. So what we want is for it to be reformed to make it fit for our purpose here in the UK,” Dye added.