- COVID-19 has accelerated digitisation within L&P firms, however in 2021, firms need to ensure the processes developed at speed are sustainable
- 2021 expected to see firms transform their people strategies to ensure they’re fit for purpose in the post-pandemic world
- ESG will continue to rise up L&P firms’ board agenda in 2021
In the year that follows COVID-19…
Ed Jervis, UK Head of Life & Pensions at EY, comments: “The life and pensions sector heads into next year in relatively good shape, despite the challenges of the COVID-19 pandemic. Many firms have accelerated the process of digitisation in response to demands from both advisors and customers during the national lockdowns. However, no one is resting on their laurels, as there remains much work to be done as we head into 2021 to ensure that newly digitised processes are sustainable long term and address operational resilience issues thrown up by the pandemic. Firms also have their work cut out for them internally, and 2021 will see many providers review their people strategies to find new ways of hybrid working that balance the positive experiences of home working with the collaboration benefits of meeting in the office. This also incorporates controls that ensure the appropriate measures to protect employees and the data and processes they are working with are in place.”
The market outlook for life and pensions…
Ed Jervis continues: “A number of major current trends within the L&P sector are set to continue next year. Low interest rates will continue to sharpen the focus on allocating capital wisely and finding sources of reliable asset growth. Whether as a principal or as an agent, the life and pensions sector directs very large capital flows into public and private investments, and insurers are making ever greater use of illiquid and alternative assets in search of that growth. This is happening even in defined contribution pension funds as long as they are large enough to absorb any pressure from market volatility without being forced to sell illiquids.”
On the transfer of defined benefit pension obligations to financial services providers…
Gareth Mee, Head of Actuarial at EY, comments: “Over the coming year, we expect to see UK businesses and their pension trustees continue to transfer their defined benefit pension obligations to financial services providers by way of insurance, superfunds and other capital-backed solutions. We think 2021 will be a record year for such transactions.”
On the outlook for sustainability…
Jonathan Calver, UK Insurance Partner at EY, comments: “For L&P providers, there is an increasing recognition that there are pricing risks for long term assets - in part due to the impact of climate change - but also with regards to the wider concerns around whether investments have suitable sustainability considerations attached to them. The key driver of progress here will be greater disclosure. With the expectation of mandatory disclosure in line with TCFD standards from 2022 onwards, this coming year will be key in terms of firms preparing and being ready for greater and more consistent reporting. This will require clearer strategies but also clearer processes and policies around measurement.
“Finding the right stance on Environmental, Social and Governance issues is challenging right now, with varying levels of data available to inform decisions, rapidly evolving regulation, no clear consensus on what customers and advisors expect and even differing interpretations of the same information among ESG data providers. But firms recognise that as major investors they need to act - and be seen to act – with ESG considerations at the heart of their investment decisions, protecting the value of their own and customers’ funds.”
On the regulatory side…
Jonathan Calver continues: “Next year will likely see some of the most significant regulatory changes the industry has ever faced, not least because the proposed post-Brexit regulatory framework means the PRA and the FCA will take on significant new powers, as we step away from the EU. It is already clear from consultations that they are looking at material reform to regulations that have driven the industry over the past decade, such as Solvency II. The FCA is consulting on how to drive advice and guidance to a wider audience, and while the Financial Advice Market Review (FAMR) has only driven marginal change to date, there are already signs of an increasing willingness to consider alternative approaches. Although it is not formally a regulator, The Money and Pensions Service (MaPS) is expected to be influential, and its Financial Wellbeing Strategy - with ambitious targets - is likely to become a yardstick for the evolution of retail L&P.
“Assuming a successful COVID-19 vaccination programme and there isn’t a return to the lockdowns and restrictions of this year, the Chancellor’s Budget in 2021 is expected to look at significant reforms to rebalance the books, which are likely to impact insurers. This could include the potential alignment of capital gains tax more closely to income tax and also pension tax relief reform.”
On emerging business models…
Jason Whyte, UK Insurance Associate Partner at EY, comments: “In addition, we expect 2021 to be the year that Open Finance begins to gather momentum, particularly once BEIS publishes its national strategy on the topic. Digitisation is bringing an ongoing focus to improving customer engagement, and with it forcing the modernisation of IT systems, driving the search for operational efficiencies and triggering adaptation to a radically changed risk profile.
“Outside the UK market, we have seen the rise of powerful ecosystems that bring financial and non-financial services together to help customers get more value for their money, and in the process radically changing the balance of competition. In the UK, we expect that these ecosystems will take off as firms get more clarity on the future of Advice and Guidance regulation and Open Finance. In our experience, it only takes one successful example to catalyse change across the market, and several providers are already looking at how to stake a claim on Open Finance and its potential.”
