PRA publishes final matching adjustment policy in PS10/24
The Prudential Regulation Authority today published its final policy on reforming the matching adjustment in Policy Statement PS10/24, completing a core element of the UK’s Solvency II review for life insurers using long-term asset portfolios. The new rules, which introduce a dedicated Matching Adjustment Part into the PRA Rulebook and revise associated guidance, start to apply from 30 June.
PS10/24, titled “Review of Solvency II: Reform of the Matching Adjustment”, follows consultation paper CP19/23 issued in September 2023 and sets out the PRA’s response to industry feedback on the proposed regime. The reforms sit within the wider Solvency UK framework enabled by The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023.
New Rulebook structure and supervisory statement
PS10/24 creates a standalone Matching Adjustment Part in the PRA Rulebook, formalising the core eligibility and operational conditions for portfolios benefiting from the MA. Alongside this, the PRA has amended the Technical Provisions, Conditions Governing Business and Glossary Parts to align terminology and valuation requirements with the revised framework.
The policy statement also updates supervisory statement SS7/18 “Solvency II: Matching adjustment”, which remains the main source of detailed expectations on governance, risk management and modelling for MA portfolios. The PRA said it has used the policy statement to address points raised by respondents to CP19/23, including calibration of new tests and the phasing of certain requirements.
Implementation timetable and phased elements
Most of the new rules and guidance under PS10/24 take effect from 30 June 2024, following the coming into force of the relevant statutory instrument on that date. However, the PRA has set later start dates for some technical requirements, including notching and MA attestations, to give firms additional time to adjust systems and models.
The requirement to reflect notching in the calculation of technical provisions will apply from 31 December rather than from the June implementation date originally proposed. Firms using internal models will then have six months from the effective date of the notching requirement to incorporate notched ratings into those models.
Mandatory notching for technical provisions
PS10/24 confirms that the PRA will require the use of notched credit ratings in technical provisions calculations for MA portfolios. This makes granular rating distinctions, for example between different sub‑categories within a letter rating band, a compulsory input to the valuation of liabilities. Highly predictable assets and the 10% MA benefit limit
The policy statement confirms that the 10% limit for highly predictable (HP) cashflows will apply to the amount of matching adjustment benefit that firms can recognise from those assets. This cap defines how much of the overall MA uplift can be attributed to HP exposures, rather than constraining the absolute volume of such assets in the portfolio.
In parallel, the PRA has revisited the calibration of the two new matching tests for firms holding HP assets and has increased the applicable thresholds from 3% to 5%. Slaughter and May reported that this change follows consultation feedback and adjusts the tolerance levels at which the tests are triggered for portfolios with HP holdings.
Prudent Person Principle for individual MA assets
PS10/24 adopts a Prudent Person Principle (PPP) condition for individual assets within matching adjustment portfolios, extending the qualitative standard that already applies at the overall investment level. Under this approach, each asset eligible for MA treatment must meet PPP expectations on security, quality, liquidity and diversification, rather than relying solely on portfolio‑level compliance.
New reporting: MALIR annual return
Insurers using the matching adjustment will be required to submit a new annual return to the PRA covering changes in their MA portfolios over time. KPMG said this return, known as the Matching Adjustment and Long‑term Insurance Return (MALIR), is intended to give the regulator a consistent dataset on asset composition, credit quality and structural features. KPMG described these as “significant new powers” for the PRA in overseeing the use of the MA.
Streamlined permissions and supervision powers
PS10/24 also changes the way matching adjustment permissions are managed, including a move to streamline variations of permission. KPMG reported that the PRA has removed references to “new risks” automatically triggering variations of MA permissions, which had been a concern for firms planning to evolve their portfolios. These adjustments are designed to reduce the need for frequent formal permission changes while maintaining oversight of risk characteristics.
Interaction with assimilated law and CP5/24
The matching adjustment reforms in PS10/24 are part of a broader exercise to restate and replace retained EU law within the PRA’s Rulebook structure. On 22 April the PRA published CP5/24, which consulted on the restatement of assimilated law in areas connected to the MA and other Solvency UK components.
The PRA said the enactment of The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023 provided the legal basis for these changes, enabling it to move detailed MA requirements from onshored Solvency II text into domestic rules and supervisory statements. PS10/24 therefore operates alongside the proposals in CP5/24 to complete the transition of MA policy into the new framework. Attestations and governance expectations
Alongside technical changes, PS10/24 introduces new expectations on matching adjustment attestations, which will apply from December 2024. Slaughter and May noted that MA attestations are one of the two areas, alongside notched ratings, where the PRA has set a later implementation date than for the main rule changes. These attestations will sit within the updated SS7/18 framework and are intended to formalise senior management sign‑off on the ongoing appropriateness of MA portfolios and assumptions. The combination of attestations, PPP conditions and enhanced reporting is central to the PRA’s approach to supervising the expanded flexibility of the MA regime.
The PRA’s final matching adjustment policy now moves into implementation, with the first key deadline at the end of June and further milestones at year‑end and into the following six‑month period for internal model changes. Firms will need to align their MA portfolios, models and governance to the new Rulebook Part and updated SS7/18 as the Solvency UK framework beds in.
--- Sources: https://www.bankofengland.co.uk/prudential-regulation/publication/2024/june/review-of-solvency-ii-matching-adjustment https://www.bankofengland.co.uk/prudential-regulation/publication/2024/june/review-of-solvency-ii-reform-of-the-matching-adjustment-policy-statement https://www.slaughterandmay.com/media/v1hho2ai/ps1024-review-of-solvency-ii-reform-of-the-matching-adjustment.pdf
