The economic signs more generally are also encouraging, with overall recovery happening faster than expected. Share prices are holding up well and the expected increases in interest rates will further boost returns. That being said, there are some headwinds in the offing and there will be a critical crunch point in Q1 next year when the furlough scheme comes to an end which could impact income flows to pensions.”
Sharpened ESG focus post COP26
Kabari Bhattacharya, UK Insurance Associate Partner at EY, comments: “The emphasis on ESG will continue to accelerate post COP26. As both major asset managers and asset owners, L&P insurers will be key to driving up ESG standards. Determining the right strategy will be critical, however, and this will have its challenges in a market where rules and regulations are still forming. The Task Force on Climate-related Financial Disclosures (TCFD) will start to crystalise how firms quantify climate risk. Disclosures in line with TCFD standards will be mandatory from April 2022. The Treasury has also announced that firms will be required to publish their net zero transition plans as part of the Sustainability Disclosures Regulation (SDR), so firms will need to ensure they are ready for these changes and have clear processes around measurement and reporting in place ahead of time.”
Will Compton, EY-Parthenon pensions ESG leader, comments: “Momentum on embedding ESG within pension scheme decision-making and implementation will continue to accelerate over 2022. Pension scheme sponsors and trustees are recognising that ESG is a critical factor that influences member outcomes and can add significant value. Regulations and Government expectations are also focussing minds with defined benefit schemes over £1bn of assets needing to publish TCFD reports as well as greater accountability being placed on trustees of schemes in relation to areas such as stewardship. For many pension schemes, their advisers and third-party service providers, these will be areas they have not meaningfully tackled before and some patience will be needed to make sure new regulations and expectations drive the right outcomes and industry behaviours.”
New FCA Consumer Duty rules will have large regulatory impact on L&P firms
Martina Neary adds: “In 2022 we expect continued focus from the regulators on the way firms are governed and in particular, their duty to customers. The FCA’s new Consumer Duty will create a higher level of consumer protection in retail financial markets, and is set to be in place by 31 July 2022. However, with only limited rules and guidance published so far, firms will have a very short period to map out and implement changes, despite the fact the new rules are likely to demand significant shifts in culture and process.
Firms will also need to put in place appropriate tracking methods, identify how best to manage customer outcomes and form a view on how they will handle situations where the overarching principles of the Consumer Duty overlap with existing regulations.
“Other regulatory demands will also take up time and resource in 2022. In particular, 2022 will be the year of IFRS17 as firms complete their implementations and get ready for the effective date of the IFRS17 standards on 1 January 2023. Most insurers are already well into delivering the necessary systems changes to bring together the additional data needed to report under the new standards. As firms assemble the data they need, focus is likely to shift to how the new reporting standards will influence their key performance indicators. Over the course of 2022, we expect to see some firms re-evaluating both their back books and their ongoing business focus in response to what IFRS17 is telling them – and will reveal to the markets.”
Digitalisation will continue to accelerate in 2022
Jason Whyte, UK Insurance Associate Partner at EY, comments: “Digitalisation accelerated during the COVID-19 pandemic with even the most traditional insurers finding that they needed to shift to remote contact with customers and digital document exchange.
But as firms get to grips with operating digitally, they are starting to see the need for more fundamental change. As digital becomes the primary channel for service and differentiation, we expect to see firms modernise back office systems and processes to make them better suited to operating in a digital world. We also expect increased focus on cybersecurity as firms adapt to the radically different risk profile working in this new environment entails.”
Open Finance set to gather momentum in 2022
Jason Whyte continues: “2022 could be the year that Open Finance finally begins to gather momentum. We are still waiting for BEIS to publish its National Smart Data Strategy, but the Government has made it clear that it intends for the UK to be leader in Open Finance. We expect 2022 to bring a legislative and regulatory timetable for implementing Open Finance. While the deadline for full implementation is likely to be several years out, we expect that there will be pressure on large providers to move early so that a critical mass of customer data is available for Open Finance applications. That in turn will accelerate firms’ legacy replacement programmes – while replacing old systems in Life & Pensions is difficult, it is still likely to be easier than adapting systems from the 1990s or earlier to safely expose their data to the outside world.”
On the transfer of corporate defined benefit pensions to insurers and superfunds
Leah Evans, UK Pensions Risk Transfer Leader at EY-Parthenon, comments: “Companies with defined benefit pension schemes continue to actively seek ways to transfer their liabilities off balance sheet. The market for transfers to bulk annuity insurance providers will remain buoyant. In addition, 2022 will see the first transactions to defined benefit superfund consolidators now that The Pension Regulator has given the go ahead to the first such provider. And we will see continuing creativity and new solutions coming into the market to more affordably meet the substantial demand.”
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