PRA clarifies matching adjustment eligibility for private assets

The PRA today clarified how private assets can qualify for the matching adjustment, setting out how its new “highly predictable” cashflow category will operate alongside existing fixed cashflow rules and the Prudent Person Principle.

The clarification comes through PS17/25 on the Matching Adjustment Investment Accelerator, which explains how the matching adjustment eligibility conditions apply to a wider range of assets and confirms there is no closed list of qualifying investments.

• Highly predictable cashflows cap: The PRA’s earlier consultation CP19/23 proposed expanding matching adjustment eligibility to assets with “highly predictable” cashflows, subject to a cap of 10% of the total matching adjustment benefit. These assets sit alongside traditional fixed cashflow instruments but are constrained in size to limit their overall contribution to the adjustment.

• From fixed to highly predictable: Under the current regime, only assets with cashflows that are fixed and cannot be altered by the issuer or any third party qualify for the matching adjustment. CP19/23 set out criteria to bring a wider range of assets into matching adjustment portfolios beyond these fixed instruments, including structures with issuer optionality that still deliver highly predictable cashflows.

• No reclassification of existing assets: The PRA stated that the highly predictable category is not intended to reclassify assets already held in matching adjustment portfolios. Instead, the PRA expects those existing holdings to remain in the “fixed” component once the reforms are implemented. Firms must instead demonstrate at application and on an ongoing basis that their portfolios meet the matching adjustment asset eligibility conditions.

• Eligibility conditions and Prudent Person Principle: The matching adjustment eligibility conditions define the features that the overall asset portfolio, and in some cases individual assets, must have to qualify. These features must sit alongside firms’ ability to identify, measure and manage risks at both asset and portfolio level in line with the Prudent Person Principle. This adds an explicit governance overlay for newer private asset types entering matching adjustment portfolios.

• Additional ALM tests for new assets: The PRA proposes two extra asset–liability matching tests specifically for highly predictable cashflow assets, designed to capture worst‑case reinvestment and liquidity risks. These tests sit on top of existing matching requirements to address the more complex cashflow and optionality features often found in private structures. This adjustment reduces the matching adjustment benefit available from these assets compared with traditional fixed cashflow instruments.

• Sub‑investment grade cap removal: CP19/23 also proposed removing the cap on sub‑investment grade assets within matching adjustment portfolios, while warning firms to exercise caution and maintain strong risk management over these holdings. The change would allow a greater share of below‑investment‑grade private credit to be recognised, subject to the broader eligibility and Prudent Person Principle framework.

• Liability eligibility extensions: On the liability side, the PRA proposed extending matching adjustment eligibility to in‑payment income protection business and the guaranteed or fixed elements of with‑profits annuities. Motor insurance books with periodic payment orders remain out of scope for matching adjustment liability eligibility.

• Streamlined evidence for applications: In PS10/24, published in June 2024, the PRA reduced the documentary evidence it generally expects with matching adjustment applications. Firms now need only confirm compliance with eligibility conditions on asset rateability and the Prudent Person Principle, rather than submitting extensive supporting material as standard.

The PRA said the primary purpose of the CP19/23 changes was to support the extension of matching adjustment eligibility to assets with highly predictable cashflows, particularly by providing worked examples for instruments with issuer optionality. The latest Investment Accelerator policy statement builds on that framework by explaining how firms should interpret the eligibility conditions and demonstrate ongoing compliance without relying on a prescriptive asset list.

--- Sources: https://www.bankofengland.co.uk/prudential-regulation https://www.bankofengland.co.uk/prudential-regulation/publication/2025/october/matching-adjustment-investment-accelerator https://www.skadden.com/insights/publications/2024/03/the-standard-formula-a-guide-to-solvency-ii-chapter-5