It is true that people who get their pension from an insurance company which fails should have some protection from a compensation scheme which spreads the cost of failures across the industry, but we should not underestimate the risks to them, the industry and the public purse of a major failure – we need to be sure that the basis on which pension promises are  Page 5  made is solid. What have we learnt about the Matching Adjustment since its invention? Given its size and the very important role in plays in our economy, it might surprise some listeners to learn that the MA is a relatively recent invention. It only came into force in the UK as part of the EU’s implementation of Solvency II a little over six years ago. Before that we had for many years allowed insurance companies to take some capital benefit from future returns – the MA took the basic idea of this older regime, and through the process of EU negotiations turned it into a new form. In many ways the EU’s MA has done its job well over those six years, but our experience of seeing it in action has made us worry about three things: First: the past may not be a good guide to the future. I explained that the MA allows insurance companies to recognise as capital up-front part of the income they expect to earn on their assets in the future.
First, the nature of the business for which it is primarily used: pensions provided by insurance companies. When an individual puts their life savings into an insurance company in return for a promise that the company will pay their pension right up until their death (potentially decades later), we need to be very confident that the company is going to be able to make good on that promise. The same is true when companies of all sorts pass their pension liabilities over to an insurance company, which is happening in very high volumes – for those pensioners too we need take care that the foundations of that insurer are robust. We estimate that over 8 million policyholders are served by this sector. [3] And second, the MA is a vital part of those foundations simply because it is so large – on the most recent figures, the total assets in MA portfolios amount to around £ billion, and the MA confers a capital benefit on insurers of around £ billion – up from around £ billion when the regime was introduced. To put that £ billion figure in context, the entire capital base of the life insurance industry is around £ billion, and for a number of insurers the MA by itself makes up the bulk of their capital. In short, millions of pensioners rely on their insurer for their livelihood, and in turn those insurers rely very heavily on the MA.