[2] The unqualified term "spens clause" is sometimes used to refer to the specific situation where the make whole payment is calculated using the prevailing gilt yield at the point of early repayment with no adjustment.
Assets that have a modified spens clause will provide to the insurer, when called, the future cashflows discounted at a reference rate (typically gilts) plus X%.
No regulatory guidance is given as to what level should be used and therefore companies have assessed, for each rating, the maximum make whole spread (i.e. value of X) that they will allow an asset to have in order to be considered eligible.
A paper[4] presented to the Institute and Faculty of Actuaries discussed the attractiveness of various instruments to different types of investor with reference to the inclusion of a spens clause.
It identified the following loan asset classes as potentially suitable for backing annuity funds provided a spens clause was included in order to manage prepayment risk: A report by consultants EY discusses the attractiveness of infrastructure investments in delivering a prosperous and sustainable economy.
It is important to reiterate that there are a variety of borrower options embedded in typical infrastructure projects, making such a mitigation technique difficult to successfully implement.
[5]A report[6] by consulting actuaries Barnett Waddingham discussed the PRA's Solvency II: Matching Adjustment letter of Saturday 28 March 2015.
[7] The Prudential Regulation Authority of the Bank of England refers[8] to spens clauses in its application of the Matching Adjustment rules under the Solvency II framework for capital for insurance companies.