The High Court hearing I referred to last week took place over 22 and 25 November, part of the process for a Part VII transfer of a portfolio of liabilities from Equitable to Utmost Life & Pensions. Martin Moore QC spoke for the applicants on Friday, I spoke for myself (as an Equitable non-profit policyholder) on Monday morning.
The Eumaeus argument, as you can imagine, was against the whole concept of the Matching Adjustment. I argued that the discounting of riskless liabilities against a portfolio of risky assets to “create capital out of nothing” was illegitimate and irresponsible, citing experts such as David Miles, professor of economics and former member of the Bank of England’s Monetary Policy Committee (“nonsense and a dangerous road to go down”).
Utmost’s year-end 2018 solvency capital ratio is quoted at 178%, but I calculate the ratio would fall to 21% without the MA, well below the 100% regulatory minimum. Utmost are claiming that of the total 168bp excess return on the supporting assets, only 38bp is down to credit risk, leaving 130bp of the spread available to generate extra (fake) capital.
The Judge quickly picked up on the MA issue on Friday when Martin Moore spoke. “Isn’t that something for nothing?” queried Zacaroli. Moore, following advice by the PRA, replied that it wasn’t, because the corporate bond spread corresponding to the MA was the result of market illiquidity, not risk.
PRA is supportive of the principles underlying the MA, not only because (properly implemented) it more appropriately reflects the risks to which annuity providers are exposed but also because it enables firms to “look through” short term volatility in the market price of credit risk to which they (as buy-to-hold investors) are not exposed.
Naturally Eumaeus took issue with all that, but more on the subject of liquidity tomorrow.