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Friends ready for a new third generation

Friends Provident chief executive Trevor Matthews has let slip that Resolution is targeting a major annuity player for its next acquisition.

Matthews: ‘The big issue is whether we can find other business to replace with-profits’
Matthews: ‘The big issue is whether we can find other business to replace with-profits’

Speaking to Money Marketing, Matthews admits Friends Provident is currently not up to scratch in the annuity market but says it is a “natural” place for life companies to operate.

He says: “I would like to think with acquisition number two and three we would pick up some real annuity expertise because we are not as strong in that area as we should be. We would not launch anything ourselves but I think it is a natural area for life companies to be in.”

Matthews believes life companies worldwide have pulled back from taking risk but says this will be a key priority of the consolidated Resolution businesses, with unit-linked guarantees being high on the agenda. But such products need further development for the market to thrive, he says.

“Third-way products are a good idea but difficult to engineer safely. We will see another generation of products that are more easily hedge-able. I was in North America when the variable annuities took off and my cynical view is that they were popular because they provided more commission than the equivalent mutual fund. But there is a real need to provide some sort of floor of income.”

He adds: “You will see some innovation in this area and I am keen for us to be involved.”

Friends Provident pulled out of the commission-paying group pension market in 2008 as part of its strategic review. Matthews claims Aviva, Aegon and Scottish Widows are distorting the market to the detriment of customers by continuing to pay hefty commission. He backs the FSA for outlawing it under the retail distribution review, which kicks off in 2012.

“We do not lose a lot of pension business but three-quarters of the business we lost last year went to those three companies so something is going on there and you cannot tell me that in every case the right thing is being done by the customer. The sooner it is finished the better. Whatever they say, I am sure they do not like paying commission. They do it to get business. They know the numbers as well as we do and the numbers do not make sense. It is just suicide as far as I can see.”

Matthews has joined Hargreaves Lansdown and Standard Life in slamming advisers who are rebating such commission payments to cash-strapped employers in a bid to secure their business. He claims such “backhanders” are crazy.

“This is just crazy stuff. It is all very complicated. It is much better to bring it all out in the open rather than pretending this stuff is free and then giving a backhander. It is not a good way to do business.”

Friends is not directly affected by the RDR as it focuses on protection insurance and corporate pensions which do not fall under its remit but Matthews praises the plans to boost the qualifications of IFAs.

He says: “You can have all the rules in world and you will still have people getting around them but if you raise standards so that it is just not done and there is a risk of being thrown out of your profession, that is where you get real traction.”

On the new National Employment Savings Trust, Matthews says the Government should have looked to Australia, where there is now more than £700bn of pension savings invested, rather than wasting time trying the get the system perfect.

He says: “You could have just turned on a switch like we did in Australia and people would have been saving for an extra 10 years. In Australia, everybody was paying in 3 per cent straight away and they now have more than £700bn invested. If they had fiddled around trying to get the perfect system, they would be nowhere near that. Getting on with it and then changing it is better than trying to build the perfect system, which is what we are doing here.”

More than half of Friends Provident’s total sales last year came from abroad and this looks set to continue as with-profits business runs down in the UK. Matthews says there are too many players fighting over  hardly any business in Britain. 

“Over the past decade, there has been no real growth. Business has just been moving from one company to another. With-profits business was much stronger in the UK than in other countries and now all that is running off. The big issue is whether we can find other business to write to replace that.”

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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Perhaps if Mr Matthews had himself to undertake an OMO pension fund vesting exercise and compare all the different retirement income products already available he might well be considerably less enthusiastic about the idea of throwing even more of them into the mix.

    Such an approach is all wrong, wrong, wrong. What we need is not more products, more “innovation”, more complexity and thus more consumer fear.

    What we need is SIMPLIFICATION (and not Old Labour simplification).

    Income DrawDown is only a small yet crucial step away from my vision of a Pension Income Bond. The fundamental shackle currently screwing everything up is GAD rates.

    Why are GAD rates there? To minimise the risk of depletion of the fund and therefore loss of all income.

    What Friends Provident and all the other players in the annuity market should be doing is not looking to design yet more third way retirement income products. They should be uniting and seeking to obtain from the Treasury permission to market a product that replaces the imposition of GAD rates with an insurance element that would safeguard the pensioner’s income stream regardless of depletion of the fund.

    If that was there, you wouldn’t need GAD rates and the amount of income that could be derived from a given size of fund would be significantly higher. Build in an assumed growth rate of 5% p.a. and aim to run down the fund in its entirety over the expected remainder of pensioner’s lifetime. The insurance element would take over if he lived beyond.

    Easy ~ so why aren’t you doing it Friends’ Provident, Prudential, Just Retirement, Legal & General and all the rest?

  2. Well Mr Stevens you have just descibed a VA with the freedom to ignore GAD rules, albeit not with 5% income. Closer to 4% and it works

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