Major regulatory moves over the past few years coming to fruition in 2025 could help pension schemes and insurers invest substantially in the UK to support the government’s growth agenda. Leading insurance and pension industry expert Francis Richard Pereira explores how these changes intersect and the opportunities they present.
Mobilising private sector investment at scale can boost the productive capacity of an economy. The UK has consistently suffered low levels of investment as a percentage of gross domestic product compared to its G7 peers.
In 2023, the Association of British Insurers (ABI) forecast that Solvency UK would enable insurers to invest £100bn in productive assets over the next 10 years.
UK pension risk transfer insurers are positioned to contribute significantly as bulk annuity market volumes are projected to average £40bn to £60bn a year in this decade.
Under Solvency UK, insurers’ competitive advantage and ongoing capacity are largely determined by investment strategy, capital management, use of funded reinsurance (also called FundedRe) and financial strength.
Solvency UK and investment flexibility
Solvency UK enables life insurers to take a more prominent investment role in the UK economy.
For pension risk transfer insurers, the matching adjustment is an important aspect of the Solvency UK capital framework.
The Prudential Regulatory Authority’s (PRA) extensive reforms to the matching adjustment rules, introduced last year, widened investment eligibility providing scope to include assets with highly predictable cash flows.
This allows innovation and investment structuring flexibility to improve risk-adjusted return on capital. Innovative investment opportunities must satisfy matching adjustment eligibility and achieve PRA approval.
The PRA has established a new matching adjustment permissions team, and in 2025 plans to consult on establishing the Matching Adjustment Investment Accelerator.
These initiatives are designed to help insurers to confidently deploy investment faster into productive financing opportunities. In this regard, the National Wealth Fund could have an important role to accelerate investments innovatively structured to satisfy the intricacies of Solvency UK.
Stress testing insurers’ portfolios
Insurers’ investment and risk capacity depends on financial strength. Any significant deterioration will limit scope for productive investment. The PRA’s Life Insurance Stress Test 2025 (conducted using 31 December 2024 data) will provide transparency into insurers’ financial resilience and capital positions.
The 2025 stress-testing exercise comprises one ‘core scenario’ and two exploratory scenarios. For the first time, individual UK insurer results will be published for the main core scenario, which tests insurer resilience to an evolving financial market shock consistent with a severe global recession. This includes credit stresses and real estate shocks through a ‘three-stage’ market scenario.
The two exploratory scenario results will be published in aggregate for the sector. First, the ‘asset type concentration’ test evaluates the impact of an additional credit rating downgrade to a material asset type, excluding sovereign and corporate bonds.
Second, the ‘funded reinsurance recapture’ test assesses resilience after recapturing the most material funded reinsurance arrangement.
The 2025 results are expected to be published in the fourth quarter of 2025. Trustees and advisers will gain valuable information on the financial strength and risk management vulnerabilities of pension risk transfer insurers. Crucially, it will demonstrate changes to these insurers’ investment capacity under stress.
The increasing need for productive investment
A report published last year by the Pensions Policy Institute (PPI) analysed how the UK’s £3trn pension scheme assets were invested in 2023.
The PPI estimates £541bn (18%) is allocated to UK productive assets by public and private defined benefit (DB) pension schemes, defined contribution (DC) pension schemes, and insurance annuities.
Separately, for annuities the ABI’s data from 2023 estimated that £178bn was invested in the UK.
The UK government intends to publish two 10-year plans in 2025. First, the modern industrial strategy, slated for the spring, alongside plans for growth-driving sectors. Second, the national infrastructure strategy, expected in June, to address social, economic and housing infrastructure.
The new National Infrastructure and Service Transformation Authority (NISTA) is expected to be operational in the spring, and will have responsibility for strategic oversight and effective delivery of infrastructure. NISTA’s ability to create an investable infrastructure pipeline and engage at ‘deal level’ with the National Wealth Fund will be crucial to unlocking additional investment from UK pension schemes and insurers.
There is fierce global competition for private sector investment. The National Infrastructure Commission’s Second National Infrastructure Assessment, from October 2023, suggests economic infrastructure will require an increased level of private sector investment from around £30bn to £40bn a year over the past decade to £40bn to £50bn a year through the 2030s and 2040s.
A prerequisite to attracting domestic and overseas institutional investment is a stable regulatory and supportive business environment with investable opportunities.
The opportunity set
Mobilising private sector investment for new economic infrastructure and fast-growing industries is important to support resilient UK growth and long-term competitiveness.
Priority investment areas should be closely related to long-term secular trends, including the energy transition (e.g. renewable clean power, green tech, low carbon and decarbonisation) and digitalisation (e.g. digital networks, 5G broadband coverage, quantum sector infrastructure, data centres for artificial intelligence and cloud technology).
Another key area is housing. The UK government’s pledge to build 1.5 million new homes by 2029 requires significant investment and represents the largest post-war housebuilding programme.
The National Housing Federation submission in February specified the funding support required from the government’s latest Spending Review to deliver 320,000 new affordable homes over five years.
Government support to housing associations is a key consideration in determining creditworthiness. Maintaining strong investment grade credit ratings is an essential requirement for UK pension risk transfer insurers, as they are significant investors in social housing debt.
A 2024 report from the Centre for Economics and Business Research highlighted a net positive economic impact of £51.2bn from building 90,000 social homes. An estimated £32.6bn would be generated within the first year following construction with significant societal benefits.
Housebuilding offers an opportunity to realise economic growth synergies arising at the intersection of infrastructure and high growth industrial sectors. For example, The Crown Estate recently appointed three UK small- and medium-sized enterprises with innovative approaches to deliver high-quality sustainable housing.
Financial innovation and a collaborative approach can accelerate the mobilisation of private sector investment at scale for productive assets.
Safely unlocking DB scheme surplus
Approximately 75% of schemes are in surplus on a low dependency basis with an aggregate surplus of £163bn and aggregate liabilities of £836bn, according to the Pensions Regulator’s data from September 2024. For schemes in surplus on a buyout basis, the aggregate surplus is £97bn with aggregate liabilities of £539bn.
In January, the UK government announced forthcoming legislative changes making it easier for trustees and sponsor employers to access surplus assets for investment to drive growth. More policy detail is expected later this year.
The timing and amount of surplus that can be ‘safely’ accessed will be influenced by trustees fiduciary duty to act in the best interests of their members, and trustee-employer agreement in the context of Funding and Investment Strategy.
To protect member benefits, new safeguard criteria to access surplus should include an appropriate buffer or ‘margin of safety’ above the scheme’s low dependency funding level.
Prioritising security of member benefits with resilient guardrails under stress will determine the surplus that can be safely accessed to fund UK productive investment. For appropriate schemes, the government’s surplus policy reforms can encourage innovation to secure improved outcomes for members and sponsors.
Funded reinsurance
The PRA is continuing to focus on funded reinsurance in 2025 to ensure insurers meet regulatory expectations as contained in its SS5/24 supervisory statement.
The Financial Policy Committee highlighted concerns in its Financial Stability Report, published in November 2024, that excessive use of offshore funded reinsurance has potential to pose systemic risks.
In particular, the report noted that “there is increasing reliance on exploiting differences in regulatory regimes”. The report acknowledged that, although funded reinsurance in the UK is currently small relative to the sector’s annuity liabilities, it could grow rapidly due to the high bulk annuity volumes projected for this decade. Furthermore, the PRA’s funded reinsurance consultation paper from November 2023 noted that the collateral portfolios of funded reinsurance arrangements rarely include UK productive assets.
Groundbreaking innovation is required to develop ‘onshore’ funded reinsurance solutions with the capability to attract new long-term patient equity capital into the UK. These new onshore solutions can mobilise significant investment into UK productive assets to support growth and replace suboptimal offshore solutions.
Crucially, new onshore solutions structured in line with Solvency UK and SS5/24 expectations would be better aligned with PRA’s statutory objectives, including facilitating competitiveness and growth.
Crowding-in private sector investment
Private market assets are an important part of the investment strategy underpinning pension and insurance solutions.
The origination, structuring and ongoing management of private assets necessitates specialist expertise to unlock private sector investment. Successful implementation of the UK government’s forthcoming industrial and infrastructure strategy will require innovative private markets financing and capital solutions.
The National Wealth Fund, sponsored by HM Treasury, is uniquely positioned to use its initial capitalisation of £27.8bn to mobilise private finance for investment opportunities that cannot be completely financed by the private sector.
The fund is expected to catalyse investment for infrastructure and the clean energy transition by crowding-in private capital on a ‘deal-by-deal’ basis. In addition, the National Wealth Fund – working alongside the British Business Bank – can support the UK’s new industrial strategy by investing in innovative businesses and transformative growth industries.
Financial innovation and collaboration are needed to address the fragmented approach to investing in private markets. This is crucial to succeed in scaling-up productive investment and close financing gaps.
Ultimately, well-structured investable projects that generate attractive long-term risk-adjusted net returns are essential to build investor confidence and mobilise private sector investment.
Francis Richard Pereira is an investment actuary (FIA) and chartered accountant (FCA) with expertise in institutional insurance and pension solutions, structuring alternative investments and digital finance.
