Meeting investment expectations: How Brexit could provide the catalyst for a more dynamic asset mix

13 March 2019

PwC explores the opportunities to develop innovative investment solutions and work with policymakers to drive sustainable change in UK Life & Pensions: A roadmap to succeed in a fast-changing sector. Fresh thinking is not only needed to break free from the constraints that hold back current investment strategies, but also embrace more complex, though potentially more rewarding, alternative investments.

More and more of our life clients are asking “is our asset allocation still fit for purpose?”

The overriding objective remains delivering sufficient returns to help policyholders fund longer lives and retirements, while controlling for risk and capital demands. The problem is that the available investment options are so severely constrained.

Hemmed-in

A huge range of even relatively low risk assets are excluded by the tight eligibility criteria within the Solvency II matching adjustment. 

In today’s low interest environment, there is also too much capital chasing too few opportunities. Diversification into long-dated illiquid assets such as property and infrastructure can help to match long-term liabilities and make up for otherwise uninspiring investment returns. Yet there is not enough of this kind of investment to go around.

Customer expectations can be equally difficult to square. Regulators are keen to ensure that insurers and policyholders understand what they’re buying into, which can exclude some more exotic assets. And while customers generally like the flexibility that comes with pension freedom, many still want at least some level of guarantee.

Further challenges centre on the growing focus on environmental, social and governance (ESG) standards, which not only require your business to judge what’s acceptable now, but how expectations might change in the future. 

Window of opportunity

From an investment perspective, Brexit opens up clear challenges. With the life industry’s real estate stakes now so high, these include the risk of a major fall in property values from a potentially disorderly exit from the EU.

However, there are also opportunities to bring regulation closer into line with the distinctive characteristics of the UK market. These might include loosening the matching adjustment eligibility criteria, which would help to broaden investment choices – for example, mortgages with prepayment options.

Dampening the capital impact of short-term market fluctuations could also pave the way for an increase in equity holdings, which would be a real game-changer. It’s important to remember that the shift from equities to fixed income is a relatively recent phenomenon. Re-investing in equities, along with direct support for start-up enterprises, would give your business more scope to strengthen and sustain long-term returns. The win-win for society would also include enabling the life industry to resume its role as a key source of funding for UK enterprise, innovation and growth.

Winning capabilities

So, how can life businesses make the most of the opportunities ahead?

1/ Dialogue with policymakers and regulators regarding adjustments to post-Brexit regulation, stressing the potential benefits for both the economy and an ageing population.

2/ Look closely at how customer expectations are changing and the opportunities for investment-led product innovation this offers – solutions that combine elements of protection and yield, for example.

3/ Ensure investment management capabilities are equipped for the rethink of asset allocation in areas such as investment targeting, policyholder reporting and managing volatility.

4/ A rethink of asset allocation within life and offers considerable opportunities for asset managers. Yet, it also requires the reporting, capital evaluation and internal credit rating capabilities needed to be effectively Solvency II-compliant.

 

Shazia Azim

Shazia Azim | Partner, Head of Strategy and Chief Operating Officer, Financial Services
Profile | Email | +44 (0)7803 455549

William  Gibbons

William Gibbons | Director
Profile | Email | +44 (0)7711 589 097

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