Solvency II threatens alternative investments

A group of investors has raised concerns that Solvency II could see pension funds and insurers move away from alternative assets.

In a letter to the Bank of England last month a group of investors, climate change experts and campaigners raised concerns over systemic risk in the UK economy from high carbon investments.

The letter read: "New regulatory requirements, such as Basel III and Solvency II, can make it more difficult for investors to deploy capital into longer term assets, such as low carbon infrastructure, and simpler to invest in the status quo, even though there might be significant appetite to do the opposite."

UKSIF chief executive Penny Shepherd - one of the letter's signatories - said liquidity and capital requirements under Solvency II could stop schemes investing in alternative assets that fit well with pension fund liabilities.

She said: "A requirement for an over high level of liquidity may inhibit pension fund investment into that low-carbon infrastructure."

Shepherd (pictured) said negotiations on buy-ins and buyouts with insurers could push schemes into short-term assets to increase their flexibility in the negotiations.

J.P. Morgan Asset Management strategic investment advisory group European head Paul Sweeting said if high and low-risk alternative investments are bundled together with the same capital requirements, schemes could be discouraged from investing in any of them.

He said: "There's a risk that some alternatives if they're not properly specified would require very large amounts of capital to be held against them which would discourage people from investing in them."

He added that it all alternatives are treated the same it might incentivise investing in assets with the highest expected return regardless of their risk.

But F&C head of insurance advisory Derek McLean said that although alternatives investments might appear less attractive in principle under the liquidity requirements, he expected investments like infrastructure to be repackaged to better fit under Solvency II.

He said: "If all the assets that are being invested for insurers and pension funds across Europe are biased towards things being packaged in a particular way I have no doubt that the companies providing them will make sure that they meet those tests."