“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,” -Tracy Blackwell- Pension Insurance Corporation.
Tracy Blackwell is right. Any reform of the solvency regime and permissions around matching assets is going to be immensely important to the UK as we reorganise our financial regulation in the years to come.
The pandemic has offered us a prologue as the current Government looks to the trillions of pounds invested on behalf of the British people and asks whether they might be more productively employed if repatriated to the UK and invested in building Britain back to pre-pandemic GDP. This argument is slightly weakened by last week’s announcement that we are pretty well back there anyway, but the bigger argument remains. It does not play well to the electorate to see overseas money invested in UK infrastructure when UK pensions are investing less in the UK than ever before.
If the pandemic was the prologue, the first act looks like being a serious debate on the consumer protection. No one is more articulate, consistent and forceful on this question than Mick McAteer and I’m pleased to see he is as clear as always
“Reforming Solvency II is attractive to insurers, as it could generate higher fees and provide a windfall for shareholders at the expense of policyholders and pension savers that use insurance-based products.
The government and regulators should not be doing deals behind closed doors without proper scrutiny and public interest representation. Financial regulators must be allowed to reach decisions objectively, not to support the political priorities of the government of the day.”
Mick stops short of drawing a red line against change. His argument is that it needs to be debated and I’m with him there too. It is clear that consumers do not want to be exposed to market turmoil when drawing their pensions, but nor do they want a pension based on current annuity rates. Similarly with mortgages, most people want a way to repay their mortgage but they will not buy a non-profit endowment. They are wary of repayment mortgages when greater flexibility is to be had elsewhere.
So the consumer’s argument is nuanced because we want it all, money in our pocket today and financial security tomorrow. We want financial services that deliver on what they promise and we want to pay a fair price for what we get. We consumers do not see these issues as black and white, but we do want to be counted in the debate.
So how does the consumer’s voice get heard?
Mick has sat on the board of the Financial Services Authority and is co-director of the Financial Inclusion Centre. He will point to the Financial Services Consumer Panel as a pre-existing body representing consumer interests.
I would be happy for any of these people to represent me, several have contributed to this blog.
And what of the tax-payer?
But Consumers of Financial Services are only one stakeholder, they double up in another role- as some of the people who pay the taxes , tax is a major consideration on this. Rishi Sunak is not arguing for greater investment in productive capital purely for reasons connected to ESG. Financial Services are subsidised by the tax-payer through various reliefs and the curbing of profiteering from the funds and insurance industry is critical to a sustainable system. While financial services companies pay taxes, their profits are typically expatriated.
I want to see the tax-payer represented in any debate, not just by HMRC, but by reasonable people such as Paul Johnson who can see economic arguments in the round.
But – and here I may not agree with Mick – I see the insurer’s and regulator’s role in this debate as central. The FT has garnered comments from anonymous sources that includes this statement
“This is the kind of thing where unanimity from the PRA would be incredibly unlikely if it’s a genuine discussion,”
In recent years, BoE officials have publicly argued that some parts of Solvency II should be overhauled, but the official said concerns originally centred around the rules not being tough enough.
We need consensus but not unanimity
I am not sure we need unanimity in this debate, indeed for this matter to be worthy of debate, we must accept that there are several positions that could be adopted, all of which have merit.
But as Mick says, to have this debate behind closed doors risks imposing risks on one set of stakeholders with neither their consent or even their knowledge of what has happened.
There are very few key players in the central argument between the insurers, the regulators and those looking to provide solutions through frameworks not governed by the PRA and FCA (master trust , CDC and whatever’s left of the DB funding code).
Some players have feet in both camps, the Super Funds ,for instance, and insurers funding master trusts or managing fund platforms for them. It seems likely that insurers will want to provide collective solutions to the decumulation of DC assets and of course they are already doing so for DB liabilities. It is hard to see any part of the funded pension space not being touched by decisions taken around Solvency II.
And it’s more than a UK debate.
This blog is parochial, it looks at the debate as UK only, but of course what we do here, will have repercussions in Europe and with global markets. It may bring more money to the UK or it may exclude us from overseas markets.
And of course, the aims of investment are now expanded beyond meeting financial liabilities, we need to ensure the money invested , ensures there is a sustainable world for people to be solvent in!
Which is why we cannot allow such a central debate to be argued out by the Bank of England and its regulator, the Treasury and its regulator and the DWP and its regulator. We need the debate to translate from the pages of the FT to the pages of the tabloids and for this to be considered while people eat their cornflakes.
Tracy and Mick are both right, though they probably differ about the answers. We need to get their questions into a public debate, this is too important an issue to be conducted behind closed doors. And here is a truly wonderful song to ponder to.