The insurance and long-term savings sector can play a key role in helping meet the unprecedented challenges and opportunities of investing in major infrastructure projects. Ahead of the Autumn Budget and Spending Review, our Director of Regulation, Charlotte Clark looks at the policies needed to help the sector rise to the challenge.
It is difficult to remember a time when investment and infrastructure were such a theme in political discussion. Whether it is the “levelling up agenda” where investment in towns and cities is seen as part of the solution to bring much needed manufacturing jobs. Or through digital infrastructure or transport links to connect places, bring opportunity or support the new ways of working that Covid has hastened in. Or the continuing need to both improve the housing stock and to continue to build new homes. Or, as we have seen this week with the Government’s plans on Green Finance, paying for the transition to a net-zero economy. The size and scale of the challenges are mind-boggling.
There hardly seems to be a week that goes by without an Investment Summit, industry challenge or announcement from the government as to how the private sector can play its part in providing funds for such projects.
Over the next 15 years additional flows of an estimated £2trn would come into the industry
This would seem like an insurmountable challenge if the demand from insurers to have greater access to projects such as these wasn’t an equally consistent message. There are currently around £2 trillion worth of assets within the industry. The desire from insurers to invest more of these assets into infrastructure projects is clear. Recent work by Boston Consulting Group for the ABI suggested that over the next 15 years additional flows, largely through the growth in Defined Contribution pensions and through the derisking of Defined Benefit pension, of an estimated £2trn would come into the industry.
So why the interest in infrastructure? There are a number of reasons. Firstly, many of the infrastructure projects have the sort of risk/return trade off that works well for insurance. We aren’t an industry that is looking for a short-term, quick win sort of investment. We invest for the long term. The liabilities of insurance companies are very well suited or matched to infrastructure, particularly in long-term savings.
So given the need for the investment and the desire to provide it from insurance companies you could assume that there was no problem. However, getting the demand and supply to meet is proving more challenging than you might expect and hope. There are practical problems around how some of those major investments might work or the practical ways to invest in them which need more attention and thought, both from government and the private sector. But regulation is also central to this.
Having a regulatory system which supports the transition of the economy to net zero is crucial. The debate around Solvency II gives both hope and concern. Hope in that one of the objectives of the review is to increase the investment into areas such as these. Hope in that the government response to the initial consultation made clear that reform was needed if a step change in investment was to come. Hope in that a similar exercise within the EU led to significant positive improvements to their regime. All good signs.
However the PRA’s recent Qualitative Impact Study (QIS) led to some concern. The options that it looked at would take investment in these priority areas backwards rather than improve the situation.
The mood music from the PRA certainly hasn’t had the same tone or tempo that the rest of government seem to have to finding a solution to these issues.
Though for those of us who play Word Bingo during the Budget speech putting investment, Levelling Up, infrastructure, green finance, private sector funding on your card is likely to get you to shout “HOUSE” pretty quickly.
So, what will the Chancellor say about these issues on Wednesday? Probably very little. It would be surprising to hear Solvency II mentioned given that Government has committed to a further consultation early in the new year. Though for those of us who play Word Bingo during the Budget speech putting investment, Levelling Up, infrastructure, green finance, private sector funding on your card is likely to get you to shout “HOUSE” pretty quickly.
In some ways the fact that the Budget and the Spending Review are unlikely to announce substantial new publicly-funded projects will be the announcement.
The government needs the private sector to step into the space to fund these projects. We shall see through the autumn whether they will make the necessary changes to allow us to do so.