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The battle for survival: Could a merger transform Standard Life and Scottish Widows?

Both companies are grappling with a hit to revenues on legacy business but could a tie-up work in practice?

transformer merger between standard life and scottish widows

The prospect of a merger between Standard Life and Scottish Widows has brought home the scale of the challenge in dealing with legacy business and points to the “fight for survival” being waged by traditional life companies.

Money Marketing understands a deal between the two life and pensions giants, which came to light earlier this month, has been on the table for some time. It was reported that talks will now take place following shareholder approval of the ongoing merger between Standard Life and Aberdeen Asset Management.

Scottish Widows and its parent company Lloyds Banking Group declined to comment on a possible deal.

Standard Life also declined to comment.

Under takeover rules, it is not allowed to speak to other parties until completion of the deal with Aberdeen.

In a shareholder communication circulated as part of the Aberdeen merger, Standard Life says “it is the intention that the combined group will explore ways in good faith to build a successful relationship with Lloyds for the benefit of their respective customers, businesses, shareholders and other stakeholders”.

It discusses the existing arrangement between Scottish Widows Investment Partnership and Aberdeen, before adding: “Lloyds’ agreement is to allow the discussions referred to above to take place in a spirit of mutual cooperation.”

The potential tie-up raises interesting questions about whether advisers and clients would benefit from yet another mega-merger, and the rationale of a deal for both parties.

But it also underscores the significant challenges faced by providers in becoming fit for the future, and the new reality for the life company giants of the past.

Why now?

Following reports of a potential merger between Standard Life and Scottish Widows, the rationale of the deal was questioned, particularly given the Aberdeen merger is underway.

One theory on why a deal may be encouraged relates to the profits generated by the providers’ legacy books. Money Marketing has heard of industry estimates suggesting the revenue from running vast numbers of old-style policies is expected to fall significantly over the next five to 10 years as older customers and baby boomers move into decumulation or pass away. As a result, companies such as Standard Life and Scottish Widows are all faced with the same problem of how best to prop up dwindling revenues.

One senior source says: “What you could end up with is two big businesses coming together which will create the same sized back book each firm had individually. Essentially it’s a fight for survival. These are big deals, but ultimately it’s about trying to stand still rather than being a game-changer.”

The Ideas Lab director Robert Reid says there are other incentives for a deal, with mergers creating the opportunity for providers such as Standard Life to become streamlined and more efficient.

These kinds of deals can take a long time to get done, and all that time you are trying to agree a deals time out of the market

He says: “The drivers here are really simple. Standard Life has made it abundantly clear the focus for them is asset management. They’ve got a top-heavy, overstaffed company. The Sipp team alone has hundreds of people in it, which is farcical.

“There’s clearly economies of scale if you bash together two admin units. Standard Life have to scale back quite dramatically, and they are going to have to do that anyway, given the duplication with Aberdeen.”

Cutting costs is often cited as the reason behind big merger deals, as well as the companies’ stated ambition to create businesses of scale.

EY senior adviser Malcolm Kerr says major acquisitions can deliver significant savings for firms in terms of infrastructure and staff costs, particularly when technology can play a role in supporting back-office functions.

But he says: “While I can easily see the potential synergies of such a deal, it would be quite sad to these two big Scottish life company brands merge into an investment management business.

The challenges ahead

Were a deal between Scottish Widows and Standard Life to go ahead, the task would not be an easy one.

The Lang Cat principal Mark Polson notes the two companies are well established as rivals and have evolved in different ways. Scottish Widows has chosen not to operate a platform, for example, while Standard Life, alongside others, has pushed to become an unbundled platform business.

Polson argues while there are similar aspects to both firms, including a strong workplace proposition, a tie-up between the two would call into question Standard Life’s business strategy.

He says: “The Standard Life Aberdeen deal is about turning the two companies into a fund management powerhouse, that is where the centre of gravity is. Effectively what they would be doing by bringing Scottish Widows into that is refocusing the business on policy administration.

“Standard Life Aberdeen would have to get comfortable with the idea they would become a massive policy admin shop as well as a massive fund manager.”

A history of life companies

Alive and kicking: 19
Aviva*, Standard Life*, Zurich*, Legal & General, Prudential, NFU, Wesleyan, Scottish Widows, Just, Unum, MetLife, Phoenix, Canada Life, Scottish Friendly, Aegon*, Old Mutual Wealth*, Sanlam*, Royal London*, St James’s Place. (*= owns a platform)

Deceased: 58
Royal Insurance, Commercial Union, Norwich Union, General Accident, Yorkshire Life, Equity & Law, Allied Dunbar, Crusader, Refuge, Schroder Life, Albany Life, M&G Life, Credit & Commerce, General Portfolio, Sun Alliance, National Mutual, Pearl, RSA Life, Swiss Life, Axa Sun Life, Axa Life, Friends Life, L&G Isle of Man, Royal Liver, MGM, Teachers Assurance, Save and Prosper Life, Euro Life, NPI, Target, Scottish Mutual, Scottish Provident, Scottish Amicable, FS, Scottish Life, Brittanic, Equitable Life, Provincial, Abbey Life, Hartford Life, Ecclesiastical Life, Clerical Medical, Cannon Lincoln, Co-Op Life, Property Growth assurance, Alba Life, London Life, Crown Life, Manu Life, Windsor Life, Mercury Life, Hill Samuel, Cornhill, Life Assurance of Scotland, Trident Life, Imperial Life, Lincoln National, UKPI.

List compiled by Novia chief executive Bill Vasilieff and EY senior adviser Malcolm Kerr

Polson points out Standard Life has already done a lot of work to manage its legacy business more effectively, and may not want to go through that pain again.

He says: “The big question here is would they get indigestion? There’s just too much to do. The big legacy book within Scottish Widows includes old endowment policies and many different classes of pension business, all of which would need to be unravelled.

“I can see why on a powerpoint slide a deal would make sense, but when you get down to the detail there will be considerable challenges in bringing those businesses together.”

Reid agrees, and says there are lessons to be learned from previous mega-mergers.

He says: “The Aviva/Friends Life deal was quite a bumpy ride, and both had big legacy problems.

“There is a real challenge in how such a business would be set up and run. The idea that Standard would merge with Widows after having just done a deal with Aberdeen doesn’t really make sense. These kinds of deals can take a long time to get done, and all that time you’re trying to agree a deal is time out of the market. Providers aren’t reliable during a merger process because their attention is focused elsewhere.”

One crucial aspect of any deal would be the Scottish Widows Investment Partnership mandate. Lloyds Banking Group sold its investment management arm Swip to Aberdeen in 2014, and as part of the deal Aberdeen manages Scottish Widows’ own funds.

Polson says continuing that arrangement may be unpalatable once Aberdeen is part of Standard Life, so a merger with Scottish Widows would ensure Standard Life maintains the Swip mandate.

But he says beyond Standard Life, Aberdeen and Scottish Widows, there is another, perhaps more important player to consider: Lloyds Banking Group.

He says: “The question is what does Lloyds see as its future in long-term savings and investments? Does it feel like it needs a provider, or is it happy to give away that revenue stream?

“Does it want to be a product manufacturer? Rather than what Standard wants, one of the defining dynamics of this will be what does Lloyds see its future as?”

What future for life companies?

Consolidation in the life company sector has been underway for decades, and big merger deals show just how much the financial services sector has changed.

Kerr says: “The unit-linked life company concept which launched in the early 1960s/early 1970s is probably defunct. What you have now is platforms replacing life companies, and in the case of a company like Transact, it actually owns the life company.

“These kind of moments are quite pivotal. When you think of all the Scottish life companies that went before, there was a massive number of players in that space. It is sad, but then again, nothing is forever. Everything has changed, but that is not necessarily a bad thing.”

Reid says in order for mergers to deliver tangible benefits for the companies involved, there has to be cost savings. He says failing to reduce overheads simply results in merging two companies’ expenses, with little progress to show for it.

Reid argues there is a wider case to support providers improving their processes, but says mergers may not be the best way to deliver that.

He says: “Providers genuinely need to drive efficiency. We see cases where general enquiries are being pushed to complaint status – that is a hopeless state of affairs. Life companies have always been record-orientated with a depersonalised structure.

“Doing a deal will spark interest, but actually pulling it all together will take real skill. Where the drivers are purely about reducing costs, that does not necessarily mean service will be maintained or improved.”

Polson says however providers evolve, they will need to present advisers with clear propositions that highlight their strengths and offer clarity to advisers about their weaker areas of business.

But he believes the dominance of the life company model is a thing of the past.

He says: “There is space for life companies to look at reinventing themselves and doing what they do well, for example bringing investments together through product wrappers. But the virtues of a life company structure in terms of the way people save and invest, both now and in the future, doesn’t feel all that relevant.

“The powerhouse element that life cos used to have feels like it is sliding away. The focus now is on great pension and workplace administration, and providing a great advisory and client experience. The providers delivering that could be anything, so the in-built advantage of being a life co goes. I expect to see life
cos retrenching. If they want to reinvent themselves as vertically integrated wealth management firms, be my guest.

gloves merger between standard life and scottish widows
When firms collide

The Competition and Markets Authority recently approved the £11bn merger between Standard Life and Aberdeen Asset Management. It investigated whether the deal would result in a substantial reduction in market competition in the UK.

A further deal with Scottish Widows would potentially further cloud the issue of competition.

This is what the competition regulator has to say about the mergers it investigates, and how big is too big.

“The Competition and Markets Authority investigates mergers and anti-competitive practices in markets and can enforce a range of consumer protection legislation.

“Mergers and markets are investigated initially, but can be escalated when necessary to more in-depth investigations. Decisions on merger and market inquiries referred for further investigation are taken by independent groups of panel members.

“We conduct market studies and investigations to assess particular markets where there are suspected competition problems. We can require market participants to take steps to address these problems.

“We also investigate mergers that could potentially give rise to a substantial lessening of competition. We can specify measures that the merging parties must take to prevent or unwind integration between them while the investigation takes place.”

The Competition and Markets Authority was set up in April 2014 and took responsibility for some of the work carried out by the Competition Commission and the Office of Fair Trading. It is independent of Government and is staffed by 700 people, with a budget of around £66m for 2017/18.




Standard Life challenged over potential Scottish Widows deal

Analysts have questioned the motivation behind Standard Life’s potential acquisition of Scottish Widows They argue time might be wrong for Standard Life to engage in another deal, as reports suggest talks with Scottish Widows will kick off this week just as Standard Life and Aberdeen shareholders have officially approved their £11bn tie-up. Lloyds Banking Group, […]


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There are 6 comments at the moment, we would love to hear your opinion too.

  1. “Could a merger transform Standard Life and Scottish Widows?”

    What a question! Do you really think they could get any worse?

  2. or is it a case of Lloyds needs to offload Scottish Widows because of capital adequacy. So who will give them a fiver.

  3. The perennial problem that life companies face is the diseconomies of scale that result from large legacy books gradually winding down.

    The choices they face are:
    1. Merge: two will go down more slowly than one.
    2. Sell to a zombie fund and hope that the likes of Phoenix are better at managing the problem.
    3. Reinvent themselves in such a way as to create new value whilst also improving the legacy book. This is the hardest to execute as evidenced by the eye-watering replatforming costs we see in the press.

    • I remember back in 2008 Lloyds were trying to offload Scottish Widows then as there were alot of worried broker consultants about from Widows. Agree with Harry they could not get any worse

  4. You’ve missed a company from the “Live & Kicking” list – LV= is still going strong, which is just as well as it pays my wages…

  5. Robert Milligan 12th July 2017 at 5:54 pm

    I note post RDR Scot Widows has not reduced its charges on direct clients unit trusts, holdings,, so its still taking the on going trail Costs and paying it out off shore!! unlike Standard life!!

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