Pension professionals have predicted a busy and challenging year for the pensions sector in 2022, with many issues continuing into the New Year alongside new initiatives for the industry to contend with.

With hope that the pandemic will subside, many commentators pointed to the increased focus on environmental, social and governance (ESG) factors in 2022.

“2022 will see the continued rise in the incorporation of key ESG issues, including but not limited to climate change, into defined contribution (DC) investment design,” said Janus Henderson Investors director, institutional DC, Dave Whitehair.

“More DC schemes will fall under the TCFD reporting requirements, which will shine a light on the current performance of DC pensions schemes in terms of climate impact, and specifically on greenhouse gas emissions. This will provide a helpful baseline for DC schemes to monitor progress, but it will also highlight parts of the investment universe where data gaps on key issues exist.

“We will also begin to see a greater focus on other responsible investment related topics, including more focus on the social aspect of ESG, as well as the theme of biodiversity.”

Hymans Robertson chief investment officer, David Walker, added that the industry has made “great strides” on ESG, but more must be done.

“The need for action and a continued drive to act will follow us into next year, with the importance of companies doing more to address, and meet, their climate obligations,” he continued.

“However, this must go beyond a tick box exercise – bold commitments are needed to mitigate further change, and action must take place sooner rather than later. We believe that stewardship by asset owners needs to continue to evolve and want to see increased accountability across the value chain.”

The government initiative to drive greater DC pension investment in alternatives and illiquids was also predicted to continue in the New Year, with DC schemes investment strategies likely to be in the spotlight.

This year (2021) saw the first defined benefit (DB) superfund being approved by The Pensions Regulator, with consolidation expected to be a key area of activity next year.

“The industry is awaiting a number of ‘firsts’ in 2022 and like a baby taking its first steps, they have been long anticipated and watched with bated breath to see if they gain momentum,” commented Isio director, Iain McLellan.

“Following TPR’s approval of the first DB superfund, the industry will be watching Clara Pensions for its first transactions and welcoming its first pension scheme members. It will be interesting to see how quickly any new players emerge onto the field.”

“We expect 2022 to be characterised by a continuation of many of the trends seen in 2021, with the theme of consolidation remaining central,” noted Hymans Robertson head of DC consulting, Mark Jaffray.

“We’ve already seen the master trust market starting to consolidate – with a reduction of 2 to 36 over 2021 – and this number is likely to continue to fall to between 30-33 over the next 12 months.”

As the pensions industry looks to modernise, experts have predicted an increased focus on digitisation in the sector next year.

This ties in with data challenges for the industry as it prepares for pensions dashboards and the continuation of GMP equalisation.

“Always nagging away in the background and so vital to the successful execution of nearly everything, quality of data seems to become more important each year – and that will certainly continue in 2022,” said Aon partner and head of UK retirement policy, Matthew Arends.

“The task of addressing data accuracy will not look so dull if a scheme faces the nightmare of inaccurate data when it comes to complete a member options exercise, buy a bulk annuity, perform GMP equalisation and so on.

“And don’t forget that the pension dashboard is all about data. By the end of the year, larger schemes should know their staging date and be working towards it. Schemes which have the earliest staging dates could be close to going live, with data, infrastructure and calculations ready, and testing due to take place. The bottom line is that having better, cleaner data is key to schemes’ ability to make better decisions on their way forward.”

Jaffray added: “Member communications will become more digital, and with the launch of the simpler annual benefit statements, and the increasing use of voting apps which allow members to express their views on responsible investment issues, leading to an increase of member interest in their pension arrangements.

“This inevitably will put pressure on fiduciaries to think more about how their pension arrangements align with their company’s sustainable development goal targets.”

Increased regulatory requirements are also expected to continue in 2022, with TPR consulting on and possibly introducing its DB Funding Code in 2022, while several requirements outlined in the Pension Schemes Act will come into force.

“It’s fair to say that regulation is always at the front of the pension industry’s collective mind,” Arends stated.

“There has been a significant volume of regulatory change over the past year and we already know that will continue into 2022.

“My fear is that TPR’s new DB Funding Code, which is expected in 2022, will turn out to be MFR2 and we will, in effect, turn back the clock 25 years on the funding regime. TPR can avoid this by dropping its requirement to measure bespoke compliance with the new regime by reference to the new fast track compliance option.

Hymans Robertson head of DB pensions, Susan McIlvogue, added: “We expect DB schemes to face a number of governance challenges in 2022, many of which are linked to the Pension Schemes Act 2021.

“New regulatory powers and notifiable events—backed by significant fines and criminal offences—will encourage sponsors to think differently. A green governance perspective will continue to build momentum, with more schemes affected by climate-change reporting obligations.

“The delayed single Code of Practice will come into force as early as summer next year, meaning a significant ramping up of governance polices and processes.

“However, my main thoughts as we look to the new year is what we won’t see happen in 2022, and that is the regulator tying a neat ribbon round a new Code of Practice on Funding Defined Benefits.

“It has been held up whilst waiting for the DWP to produce draft regulations, making the hopes of a new code in force next year less likely. Nevertheless, the release of draft regulations and a draft code should be imminent in 2022 so trustees and sponsors should soon get a glimpse of what’s in store for them.”

The increased regulatory burden has ramped up fears that there will be a ‘talent crunch’ in the industry, with challenges for trustees and administrators expected.

Furthermore, with the ongoing economic issues driven by Brexit and the pandemic, fears of rising inflation have been noted.

“Rising inflation continues to be in the spotlight for pension schemes, with UK RPI recently hitting a 30-year high and the IMF warning the Bank of England to increase interest rates in order to dampen demand,” said Isio director and head of investment research, Ajith Balan Nair.

“Higher long-term inflation expectations in the second half of 2021 have already sparked the need for schemes to consider refreshing their hedging strategies and the outlook for 2022 remains very much uncertain as central banks and governments factor in the potential economic impact of the new Omicron variant into their monetary policy decisions.

“We continue to advise clients to review their hedges annually, or in the event that long-term inflation expectations materially change following hedge design.”

Whatever 2022 has in store, industry experts appear united in the feeling that it will be a busy and challenging year for everyone in the sector.

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