PIC calculates it would be able to pump £500m more into renewable energy annually if financial services regulation is amended
Tens of billions of pounds could be unlocked for renewable energy and domestic energy efficiency if the UK government moves ahead with post-Brexit reforms to the Solvency II regulatory framework for insurance companies.
That is the central argument of a report published this week by Pension Insurance Corporation, a specialist insurer of defined benefit pensions funds, which claims that reform to the EU prudential regulatory regime for insurance firms could be “the first major ‘Brexit bonus'” for the government. It argues that a new set of “UK-specific” rules could unleash much-needed funds that could drive progress towards a net zero economy, both during this parliament and beyond.
The Solvency II regime – which is designed to protect insurance policyholders by essentially telling pensions providers where they can and cannot invest – has long been seen as a key target for post-Brexit reform. Advocates for changes to the rules argue the EU framework should now be adjusted to suit the UK’s particular needs, rather than the general needs of all insurance companies across the bloc’s member states.
The UK Treasury and Prudential Regulation Authority has pledged to work together to design a package of proposals for reform of Solvency II in the first months of this year, after conceding that many aspects of the current regime were “overly rigid and rules-based” in a response to a call to evidence over last summer.
This week’s report from the PIC argues that reforming financial services regulation is critical if the government wants to deliver on its ‘levelling up’ and net zero agendas, arguing the current regime is hampering much-needed investment in the infrastructure needed to deliver on both briefs. It claims that PIC alone would be able to increase its planned investment of £30bn in so-called ‘productive finance’ by 2030 to £50bn if the system were reformed.
According to PIC, current flaws in the regulations mean life insurance companies are encouraged to invest in large, well-funded companies, to the detriment of newer sectors than need more support to grow. The company claims it has forgone £10bn in productive finance investments since 2016 due to “overly restrictive” Solvency II requirements.
The report warns of “a real danger of missed opportunities through delay and a failure to achieve the full potential of reform, affecting the lives of millions of people”.
“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,” said Pension Insurance Corporation CEO Tracy Blackwell. “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.”
PIC estimates that with “appropriate and UK-specific” reform of Solvency II, it would have an additional £2bn annually to invest in productive finance in the short-term, of which £500m could be channelled into renewables or green assets. An investment of that size would cover the costs of roughly 35 offshore wind turbines, or 14 solar parks, it said.
It claims that a UK-specific regime would enable it to pump an additional £450m into the social housing sector, which it said could fund the energy efficient retrofit of 53,000 social homes.
The insurer said it would like to see reforms that would encourage investment into productive finance and preserve “insurer balance sheet resilience throughout the cycle”, protecting policyholder pensions, while discouraging investment in relatively risky assets like overvalued markets.
Frank Gordon, director or policy at the Association for Renewable Energy and Clean Technology (REA), welcomed the report’s conclusions, noting that significantly more institutional investment would be required to achieve the UK’s 2050 net zero goal.
“A lack of available finance can be a barrier to developing new renewable and clean tech projects, and the changes proposed would help unleash a wave of new investment that can help take us to net zero,” he said. “Such investment will create jobs and ensure that green tech can be built quickly, while also tackling other problems like air and noise pollution.”
The government now faces a tricky balancing act, as it looks to respond to insurance industry calls for more freedom over where it can invest while ensuring solvency rules remain sufficiently robust to guard against the risks of another financial crisis. However, there is a growing sense that the idea that renewables, clean tech, and net zero-related investments are relatively high risk is now badly outdated and is undermining efforts to mobilise the billions of pounds of investment needed in new green infrastructure. If the government wants to accelerate the transition to net zero, rules that restrict the flow of investment into green projects could be a good place to start.