Actuaries have said that the latest government guide to investing in UK infrastructures assets will be of welcome interest to UK life insurers who are keen help boost the economy and improve yields on their assets.
Yesterday, Chief Secretary to the Treasury Danny Alexander published the guide, which outlined 14 individual infrastructure programmes and projects worth over £15bn that are open to investment.
Opportunities to invest include: the circuit of Wales, a regeneration project that provides hotels and retail facilities; the Shetland investment fund, which requires an expansion and upgrade of infrastructure need to access oil; and Estover Energy, who are developing a number of new small-scale combined heat and power plants.
Keith Goodby, co-lead at Towers Watson insurance investment advisory department, said the guide would be viewed with interest by an industry keen to both support the UK economy and improve returns on their asset portfolios.
But he warned that there would be 'some challenges' to insurers investing in infrastructure.
Goodby said: 'Most notably the recent pension reform announcements in the Budget, whereby individuals are no longer required to buy an annuity in retirement, came as a surprise to the industry that had previously made pledges to invest in infrastructure.
'Whilst a welcome reform from the point of view of flexibility in pension solutions, annuities were the natural source of funding for infrastructure investment by insurers.'
Neil Chapman, a director of Towers Waton's insurance consulting business, added that insurers were grappling with the proposed Solvency II's matching adjustment which requires certainty of cash flow from underlying assets, in order to benefit from higher liability discount rates and consequentially lower reserves for annuity business.
Unless there are suitable Spens clauses - which require the borrower to compensate the lender for prepayment at a rate based on the value of discounted future cashflows - insurers are unlikely to be able to use them for the matching adjustment, which would have a significant impact on their attractiveness.
Chapman went on: 'There are also considerations of alignment with insurers' desire for a long-dated tenor and low risk high yield assets; that is, assets with a strong credit rating and high yield. The UK Guarantees Scheme seeks to address the credit rating but most likely at the expense of some yield.
'Insurers may also want to avoid investment in projects that carry political and reputational risk, such as on-shore wind farms. Similarly, they may feel there are potentially long-term unknowns around investment in Scotland with the independence referendum in September.'