Solvency II Review – Matching adjustment reform implementation considerations for 30 June 2024

Statement

The Prudential Regulation Authority (PRA) is currently considering feedback to its consultation on proposed reforms to the matching adjustment (MA) and is on track to publish a policy statement, including final rules, in early June. The PRA is issuing this update to respond to clarifications requested by firms in their responses to the consultation paper (CP), and to assist relevant insurance firms to prepare for implementation of the MA reforms in a way that makes efficient use of resources and allows firms to make the most of new investment opportunities facilitated by the reforms.

On 28 September 2023, the PRA published CP19/23 – Review of Solvency II: Reform of the Matching Adjustment. The consultation period closed on 5 January 2024. The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 provide the UK Government’s legislation relating to reform of the MA and have a commencement date of 30 June 2024.

Existing approvals

The PRA notes that the Government has said that existing approvals of firms relating to measures covered by Part 4 of the Solvency II Regulations 2015 will continue to be valid under the reformed regime.^{footnote [1]} This includes existing MA approvals. Consequently, the PRA has no plans to require firms to reapply for permission to apply the MA when such permission has been provided prior to 30 June 2024.

Treatment of existing fixed assets under the new regime

CP19/23 included proposals relating to the inclusion of assets with highly predictable cash flows in MA portfolios. The PRA understands that some firms are concerned that the details of the policy proposals in CP19/23 may require the reclassification of significant volumes of existing assets in MA portfolios as having highly predictable cash flows (rather than fixed cash flows). However this is not within the scope of the proposals that the PRA set out in CP19/23, which were only intended to broaden the MA eligibility criteria to go beyond allowing assets with fixed cash flows (consistent with The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023) , rather than to change the PRA's policy on where assets are considered to have ‘fixed’ cash flows. Where necessary, as part of the finalisation of the policy and rules on the MA, the PRA will consider changes to the proposed policy materials to clarify that changes to the PRA’s policy on what is ‘fixed’ was not within the scope of CP19/23. The PRA will seek to ensure that no unintended changes are made to the PRA’s policy on assets which are considered to have ‘fixed’ cash flows.

Implementation of new requirements

In CP19/23, the PRA also proposed new requirements for firms under the reformed MA framework. The PRA notes that the general intended implementation date of the reforms is 30 June 2024, and that firms have noted this may pose practical challenges in some areas. The PRA will communicate, as part of the policy statement, the date(s) on which new requirements will take effect, and whether early adoption will be possible on a voluntary basis. In advance of the policy statement publication, the PRA notes the following comments relating to specific proposed new requirements:

• MA attestation – the PRA understands that it will take some time for firms to be able to fully document an attestation. CP19/23 proposed that the timing of annual attestations be aligned with a firm’s SFCR, which would result in an effective date of year-end 2024 for most firms. The proposed policy relating to voluntary fundamental spread additions would allow firms to consider their use beyond just the purposes of attestations, and at any time.
• Voluntary fundamental spread additions – The PRA also understands that it will take firms time to embed their processes for determining if a voluntary fundamental spread addition should be applied. Firms would have the option to apply such additions to the fundamental spread from 30 June 2024, with the PRA expecting firms’ processes in respect of such fundamental spread additions to be fully embedded in time for their first year-end after that date (as for attestation this should align with firms’ SFCRs, which for most firms will be 31 December 2024).
• Notching of the fundamental spread – as noted above, it is not expected that firms will need to submit new MA applications to reflect the new regime at the point of implementation (unless coupled with other changes to the MA portfolio that would require a MA application). The PRA is aware that firms will need time to be able to document compliance with the new notching requirements, and intends to provide firms with more information on how this should be completed in due course.
• Sub-investment grade MA cap – as for notching, it is not expected that firms will be required to submit a new MA application to document compliance with the new regime at the point of implementation (unless coupled with other changes to the MA portfolio that would require a MA application).
• Triggers for variations of MA permissions – the PRA is aware that some firms interpreted the proposed changes to SS7/18^{footnote [2]} relating to the expected triggers for variations of MA permissions as requiring new applications in a wider range of circumstances than is currently the case. The PRA’s proposed policy intent was not to change the status quo on this issue, but rather to improve clarity.

PRA application review process

The PRA will provide further guidance and materials on the MA application process under the reformed regime in advance of 30 June 2024.