Annuity curbs ‘harming infrastructure push’

Insurance companies investing billions in the bond market have warned that restrictive rules on vast pools of annuity money are stifling Britain’s infrastructure building push.

A raft of institutions told the Treasury Select Committee that an aspect of Solvency II law called the matching adjustment, which is overseen by the Prudential Regulation Authority (PRA), was halting investment of annuity funds into UK infrastructure projects and other assets.

The matching adjustment effectively makes it harder for insurers to use their annuity funds to buy lower-rated bonds which are typically used to back the construction of UK building projects. Some want the PRA to take a more flexible approach to the rule and open the floodgates to greater investment.

“It is difficult to see any benefit from tightly restricting trading in annuity books,” Prudential said. “Solvency II effectively ensures that there is a decreasing level of capital available over time to finance the ‘real’ economy.”

Chancellor Philip Hammond (pictured) last month made infrastructure the centrepiece of his plan to solve Britain’s productivity gap.

Insurer Willis Towers Watson also said that demand for assets like callable bonds and lifetime mortgages — which were snapped up in droves by insurers before Solvency II — had become “distorted” because they are no longer eligible for insurers to buy under the matching adjustment.