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John Perks: LV= may demutualise in the future

LV= managing director of retirement solutions John Perks discusses possible demutualisation, the future of the annuity market and LV=’s relatively “painless” RDR transition.

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LV= managing director of retirement solutions John Perks will not rule out demutualising in the future as the provider targets growth in its core markets.

The majority of insurers in the UK are now owned by shareholders rather than their members.

Some argue this model encourages companies to chase profit at the expense of their customers.

LV= is one of the few mutuals left in the insurance sector. However, Perks says it would consider demutualisation if its expansion plans demanded extra capital.

“It is an advantage for an insurer to have the right customer values and I think that can be linked with mutuality,” he says. “But there are good and bad mutuals.

“We want to be commercial and compete with the big providers but we also want to make sure we have the right products and pay claims at the right time.

“We have never ruled demutualisation out but we are very happy being a mutual. If we required more capital in the future it would be considered but at the moment we are very comfortable with where we are.”

LV= has looked to position itself in retirement markets where it anticipates significant future growth. It does not write regular premium pension business, for example, but it does offer enhanced annuities.

Many expect demand for enhanced annuities to increase once the Association of British Insurers’ shopping around code of conduct has been introduced on March 1.

One of the aims of the new code is to make more consumers aware they could receive a better annuity rate if they are a smoker or have health issues.

Perks says: “We want to be top five in our key marketplaces. We are targeting growing markets which is why we are focusing on products like enhanced annuities, drawdown and fixed-term annuities.

“We will never be bigger than someone that is in the regular premium pension market and that is not a market we want to be in.

“Enhanced annuities started out as a simple smoker product but we are seeing lighter enhancements now coming to the market.

“It was always thought that standard annuities would start to encroach on the enhanced market, but what has actually happened is enhanced players have started to chip away at the standard annuities market.”

Last week, Aviva issued a statement urging the ABI to build on its shopping around code by forcing all providers to individually underwrite annuities.

Perks backs Aviva’s stance but says moving towards individual underwriting will present challenges to healthy retirees.

“I think eventually all annuities will be underwritten,” he says. “That will bring challenges for consumers because if you are very healthy what does that mean for the annuity rate you are going to get?

“I could ultimately see the standard annuity market disappearing and it will be either enhanced or flexible solutions such as fixed-term annuities.”

Despite predictions of huge growth, LV= is one of only four providers currently offering fixed-term annuities. MetLife, which took over distribution of the Living Time product in January 2011 and launched its own fixed-term annuity in September 2011, pulled out of the market in September last year.

Fixed-term annuities have also come under attack from some in the industry. In May last year, Legal & General said it had “deep concerns” about the potential for misselling of fixed-term products.

However, Perks remains confident the product offers a valuable alternative to standard annuities and drawdown and should be considered as an option by advisers.

He says major providers have steered clear of the market because they do not want to “cannibalise” their existing book of business.

“When you look at enhanced and fixed-term annuities, the standard annuity players will not want to cannibalise their own book which is why it was interesting to see Aviva move into the fixed-term market,” he says.

“I think fixed-term annuities are a clearer consumer product than variable annuities, which have not really grown and have suffered from market hits more than other products. I think we will start to see more and more solutions like this and the market has already grown as a whole.”

Like most providers, LV= has had to undertake an RDR preparation project. However Perks says the transition was comparatively painless because the company did not have any legacy issues to contend with.

He says: “Insurers are spending a lot of time at the moment reacting to regulatory change rather than developing new consumer-friendly products.

“But our RDR preparations were actually relatively cheap. It was sub-£1m as a project for us.

“The main phase was a six-month project for us so it was not particularly difficult. I know a lot of companies, particularly those with legacy products, had a much tougher time but that is the advantage of being a relatively new company.”

While supportive of the aims of the RDR, Perks is frustrated at the FSA’s refusal to reform the pensions illustration regime. He says projected returns should be based on the underlying assets someone is invested in rather than the standard rates currently used.

“I think the FSA could have prescribed asset-by-asset projections,” he says. “That is something that has frustrated us.

“It did not want to go down that route because people were arguing it should not be that granular, but companies could use their sales aids to show they have a track record which backs up their projections.”

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