Reform of Solvency II could unlock “tens of billions of pounds” to invest in social assets in the UK, including renewable energy and social housing, the Pension Insurance Corporation (PIC) has claimed.

In a new report – Investment Unleashed – the PIC has calculated that appropriate reform could increase its planned investment of £30bn (€35.9bn) in productive finance by 2030, to £50bn.

Reform of Solvency II in the UK is currently being considered by the HM Treasury and the Prudential Regulation Authority.

However, PIC, noted, there is a real danger of missed opportunities through delay and a failure to achieve the full potential of reform.

The Corporation argues that current flaws in the regulation mean that it and other life insurance companies are encouraged to invest in large, well-funded companies to such an extent that the UK is being deprived of the benefits of increased long-term investment in the economy.

Since 2016, PIC has invested £10.9bn in productive finance. However, over the same period £10bn of productive finance investment was foregone by PIC due to overly restrictive Solvency II requirements, it said.

Primarily designed to protect the pensions of millions of savers already within the protective walls of Solvency II, the rules as currently implemented do not take into account the system-wide benefits of significantly increased infrastructure investment, even where that increases policyholder protections over the long-term, the PIC report argued.

“Whilst Solvency II has many features that benefit the UK, reforming it to better suit our specific needs rather than the general needs of all insurance companies across every EU member state presents a once-in-a-generation opportunity to unlock and channel hundreds of billions of pounds of UK savings into projects that support the race to net zero and the levelling-up agenda - into what the Treasury is calling productive finance,” said Steve Hughes, PIC’s associate economist an author of the report.

The report also states that reform would open up an additional £450m of investment into social housing, equating to the funding of 15,000 additional affordable homes every year (more than 10% of the total of new social homes needed across the UK annually) with the potential for 45,000 new social homes in the first year after reform, or the energy efficiency retrofit of 53,500 social homes (meaning social housing residents would face lower fuel bills and less associated health problems from cold homes), or maintenance costs for 285,000 existing social homes.

Tracy Blackwell, chief investment officer of the PIC, said: “We have a once in a lifetime opportunity to channel new investment into communities across the UK, building quality homes, decarbonising our economy, creating jobs and levelling up.

“The life chances and financial security of millions of people across the country depend on the timely and successful reform of this key piece of financial services regulation. Success would incentivise tens of billions of pounds of long-term investment and enhance consumer protections.”

The PIC report suggested that the ideal reform of Solvency II would:

  • preserve insurer balance sheet resilience throughout the cycle – protecting policyholder pensions – whilst discouraging investment in relatively riskier assets in overvalued markets;
  • encourage investment into productive finance throughout the cycle;
  • bank the UK’s “Brexit bonus” by ensuring a competitive UK insurance industry – especially when compared to insurers operating under the European Solvency II regime.

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