The markets in 2023 – Cover story
Nevertheless, he says there are good reasons to think that insti- tutional investors will maintain their exposure to the asset class. “First, insurance companies and pension funds have already invested in private markets, you cannot suddenly stop that,” Eakins says. “Secondly, private market assets are a good fit for our liabilities because we can tailor the cashflows to meet them. “The third reason is that we would want to keep an eye on the value extraction that we have in private market assets. I would not want to be alarmist and say the boom in private markets is over, but there will be slightly less demand,” Eakins says. Changes in regulation could also be a decisive factor for insur- ance investors. One key element of chancellor Jeremy Hunt’s autumn statement was a pledge to overhaul Solvency II, the EU rules setting the capital requirements for insurers. Hunt’s proposals include cutting the risk margin for long-term life insurers by 65%, while risk margins for the general insurance business will drop by 30%. Hunt also plans to broaden the eli- gibility criteria for matching adjustment. The reforms have been welcomed by insurers, who see them as an opportunity to invest more in private markets.
All change
Investors from all walks of the institutional market share a sense that 2023 will bring about important changes. With inflation and interest rates set to rise, investors are having to rapidly adapt to a new normal. It is too early to predict which asset classes will benefit and which will lose, but there is already a clear sense that we may see a rotation of actors. While closed DB schemes are on track to retreat from illiquids to consolidate for their endgame, open schemes could continue
to diversify. Meanwhile, rapidly growing DC schemes are also on track to enter new markets. Insurers will have to weigh the prospects of new regulatory incentives to invest in infrastruc- ture and private markets against the appeal of higher returns and liquidity in fixed income. 2023 is set to be a year of changes as investors adapt to a new normal.
I am encouraging all of my schemes to take stock once the dust has settled from the liquidity crisis.
Alan Pickering, Best Trustees
(Bank of England) CPI Inflation Projection
0% 2% 4% 6% 8% 10% 12%
Q4 22 Mode Q1 23 Median
Q2 23 Mean
Q3 23 Uncertainty Q4 23 Skew Source: Bank of England Issue 119 | December-January 2023 | portfolio institutional | 23 Q1 24 Q2 24 Q3 24 Q4 24 Q1 25 Q2 25 Q3 25 Q4 25
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