Investing like an insurer: can’t pension schemes do better than that?

Simeon Willis explores whether pension schemes should exploit their regulatory status and pursue a more ambitious approach when investing for the longer term.

Conventional wisdom often advocates that pension schemes should invest more like an insurer. In part this likely reflects the track record for pensions versus insurers. Currently around 430,000 people receive benefits from either the Pension Protection Fund or the Financial Assistance Scheme, having had the misfortune of being a member of a failed Defined Benefit pension scheme. Meanwhile there have been no incidents of a bulk annuity life insurer failing. No wonder pension professionals look for what can be learned from the success of the insurance market, and rightly so.

What have insurers got so right?

Insurers have been successful as a result of a number of aspects including highly cautious capital reserving requirements and funding buffers, combined with professionally managed, conservative investment strategies. 

Homing in on investments, insurers are widely considered to be very sophisticated investors. Every now and again you hear of insurers financing of high profile UK investment opportunities with their deep pockets. Take Battersea power station shopping centre and apartment complex.  I’ve personally witnessed this fantastic example of urban regeneration evolve on a daily basis, having regularly taken the train past this iconic landmark for a quarter of a century. If you haven’t been it’s worth a day trip by boat, bus or, thanks to investment from the insurance industry, by tube. Back in 2015, a £200m investment by Rothesay Life had a key role to play in the £1bn extension of the Northern Line.

These sorts of landmark investments get lots of attention but the truth is that insurer portfolios in the main tend to be extremely boring. Boring in the best possible way I should add - featuring high degrees of cashflow matching from investment grade assets, whilst avoiding higher risk assets such as equities. 

The grass isn’t always greener

But there’s a good reason why insurers have invested conservatively - they largely had no choice. Tight regulation means insurers have to work tirelessly to find attractive investments that they not only want, but also are allowed to invest in.

The Prudential Regulation Authority (PRA) has very strict rules on how insurers can invest under Solvency UK. Good investment discipline is rewarded via Matching Adjustment or “MA”. In short, an insurer can reduce the amount of reserves and capital it is required to hold, if it can find assets that meet the eligibility criteria set out by PRA, where the insurer has already successfully made an MA application for that asset class. This incentive is so great that life insurers are reluctant to stray outside of their MA eligible asset classes. The problem is that the process for applying to the PRA for Matching Adjustment takes time, and even then, lots of great assets will still fail to meet the eligibility criteria. For example, anything that involves prepayment risk e.g. loans that can be paid off early.  Prepayment means the investor has less certainty on the timing of the cashflow it will receive - so it doesn’t cashflow match. This prepayment issue alone rules out most of the Asset Backed Securities market which continues to offer healthy yield pick-up relative to comparable quality corporate bonds. Other assets such as property and high yield credit are often completely off limits.

But insurance regulation is catching up

The PRA has recognised the constraints that MA places on insurers and is taking steps to allow insurers to be more nimble, such as increased staffing at the PRA to permit faster turnaround of applications. It is also consulting on an “investment accelerator”. This will grant a window of opportunity for insurers to invest up to 10% of their portfolio in assets that aren’t currently MA eligible.  This means insurers can take advantage of market opportunities and let the paperwork follow, rather than miss the boat. Insurers will still be sticking their necks out though, because if eligibility isn’t granted within 2 years the asset will need to be sold.

The only rule is that there are no rules

By comparison the regulatory constraints on pension investment appear practically non-existent. Whilst I admit saying that may be somewhat provocative in the pursuit of making my point, pension schemes can invest in the wild west world of cryptocurrencies, so it is not completely unjustified. And therefore, when it comes to investments, pension schemes currently have scope to invest creatively to a degree that an insurer could only dream of.

There’s no time like the present

Pension schemes have historically had substantial deficits which drove them to invest in a riskier way than insurers and gave them less of a safety margin. That’s no longer the case for most schemes, with the average UK defined benefit pension scheme estimated to be 112% funded on a buyout basis*. This favourable funding position creates a fantastic opportunity for pension schemes to play the aces in their hand. There’s plenty of merit in considering the full range of available assets including those that offer some upside potential - given there is scope for this upside to be shared with all stakeholders (not least, members). This naturally includes assets that insurers are unlikely to invest in despite the reforms in their market and represents a source of comparative advantage for pension schemes. 

Of course, despite the misleading headline, pension schemes can still learn a lot from the excellent practices employed by insurers. In particular, forward-thinking professional asset management combined with measured risk budgeting and closely monitored positions. But when it comes to sourcing and investing in innovative assets, perhaps the greatest rewards will come to pension schemes that can tap into unfished waters, by choosing to invest not-like an insurer. Given the current landscape, what better time than the present?

*Source: XPS’s UKDB tracker as at 30 September 2025