Brownie points can be a Big Deal

Mike Spink

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Spence & Partners latest blog for Pension Funds Online –

A bleak November Friday evening a few weeks ago.

“You are getting ready aren’t you?”.

“Yes, yes”.

But actually I wasn’t. Nowhere near ready. I may be a while and I think I’m going to need to spend a few brownie points.

What had delayed me was some breaking news which, if substantiated, could lead to the largest insurer consolidation deal in 15 years, sending shockwaves around the corporate pensions marketplace. The news item spoke of a potential offer by the giant composite insurance group Aviva for the specialist life and pensions firm, Friends Life Group. The last time we saw a deal of this size in the sector was 1990 when Aviva was formed from the marriage of CGU and Norwich Union. Such a deal might increase Aviva’s market capitalisation from c£15Bn to c £20Bn and could potentially usher the next round of market consolidation. But I need to get ready, so the bigger picture will have to wait. Just time tonight to check that the story has legs and then issue a heads up to my Aviva / Friends Life corporate pension scheme clients. More to follow.

Fast forward to 1 December and we find that the ‘leak’ does indeed have substance. Subject to shareholder / regulatory approvals, Friends Life Group will begin to be subsumed into Aviva during 2015, with complete amalgamation potentially being finalised in 2017. For Aviva Investors (the fund management arm), the deal might see inflow of c£70Bn of funds and the newly combined group might serve a total of 16 million UK customers, touching 1 in 4 households. Mind boggling stuff.

But with so much pensions market change to grapple with right now, why would one contemplate a deal of this magnitude at the same time? There must be a fear that the people guiding both pensions businesses through the current maze are the same people who will now have a much bigger ship to navigate next year. As such, existing client service levels will undoubtedly come under the harshest of spotlights – and what about the impact on new business? Spence, like many other corporate pensions advisers, features both companies on our group pensions panels and it’s not uncommon in such circumstances for affected providers to be taken off panel temporarily, pending further announcements / reassurances.

Both Boards will of course appreciate these risks and will be going to great lengths to reassure all stakeholders accordingly. But we haven’t answered the ‘why now’ question yet and I think there might be two key influencers:

  • Cash flow – the lifeblood of any business. It’s quite possible that the relative ‘cash richness’ of Friends Life Group was a significant factor as Aviva considered ways of replenishing its coffers.
  • The new world of ‘pension freedoms’ – annuity products are amongst the most lucrative for life and pension firms and this market is contracting quickly (even if its reported death is very premature). Amalgamating the two organisations and harnessing thought leadership around new retirement income products might see the combined entity retaining a greater share of pension assets looking for a decumulation home, than might otherwise have been the case.

Whilst it’s early days, as expected, the Friends Life corporate pensions model looks set to take the strategic lead, reflecting the significant investment and success of this area of its business. Whilst Friends Life clients will be pleased to hear this news, it remains to be seen what manner of transition exercise Aviva’s corporate pension clients might be facing over the next few years.

In terms of market positioning, we shouldn’t overlook the current attraction of DC Master Trusts: Friends Life play in this market (having launched their product Q2 this year) whilst Aviva don’t: potentially a nice fit. Finally, Friends’ CEO, Andy Briggs, becomes Aviva UK Life CEO – another clue as to how the new combined group pensions business might be structured.

In the wider context, significant savings are forecast, although it’s noted that the analysts seem not to be overly impressed with the speed at which these might emerge.

Only time will tell if this potential mega deal will be the catalyst for a new round of life and pension provider consolidation. We already know that the number of stand alone Trust-Based DC schemes will reduce rapidly so it’s not too big a leap to suggest that such scheme consolidation will play a part in further potential scheme provider consolidation.

But I’d appreciate a few months gap to help me replenish the brownie points.

Pension Funds Online – 05/12/2014