View more on these topics

Mega Merger: What does the £5.6bn Aviva/Friends Life deal mean for advisers?

The proposed £5.6bn mega-merger of Aviva and Friends Life will result in thousands of job losses and rock the foundations of the UK pensions, protection and investment industries, experts are predicting.

Last week, the Aviva and Friends Life boards revealed detailed discussions on the biggest pension deal in years.

The Friends Life board has indicated it is willing to recommend a sale to shareholders subject to details being ironed out. The deal would create the largest insurance and savings business in the UK, with 16 million customers.

With key decisions on the future structure of the new insurance giant still to be taken and analysts predicting vicious rounds of cost cutting, Money Marketing looks at what the Aviva and Friends Life merger could mean for the market and advisers.

‘Russian doll’

BNP Paribas says the Aviva and Friends Life tie-up will result in more than £100m worth of cost savings and could see Friends Life’s 3,872 staff savagely cut. The analyst expects 40 per cent of staff costs, or £80m, will be stripped out of the business.

At the end of 2013, one-third of staff were working in Friends UK life business, one-third internationally, 8 per cent supporting outsourced business and 25 per cent in the corporate centre and shared services.

BNP says there could be some savings in cutting Friends’ £50m annual IT bill and ongoing Solvency II costs.

As markets opened on Monday following the announcement, Friends Life shares jumped 6 per cent and Aviva plunged 5 per cent, giving the snap investor verdict.

Friends Life group is a mish-mash of different firms as takeover after takeover has combined brands. The group has customers from Sun Life, Friends Provident, F&C Management, Axa UK Life, Bupa, Resolution, NM Financial, UK Provident, Century Insurance and London & Manchester Group, among others.

Aviva is no less eclectic with customers from General Accident, Commercial Union, Norwich Union, Yorkshire, Northern, North British & Mercantile, Scottish Union and National.

Hargreaves Lansdown head of pensions research Tom McPhail says: “In the 1980s there were dozens of pension companies in the market. Aviva is like a Russian doll having taken over various companies. This type of consolidation has been going on for years.”


One of the stated aims of the proposed Aviva and Friends Life merger is to better cope with the regulatory and political turmoil engulfing private pensions.

Share prices at the UK’s biggest insurers have fared extraordinarily well in spite of the Budget shock on pension freedoms. Just before last week’s bombshell merger announcement, Aviva’s shares had risen more than 20 per cent in the last 12 months, while Friends Life’s value remained static.

Aviva says its corporate pension assets under administration would more than double as a result of the merger and create new opportunities by serving Friends Life’s £2bn of annual pension vestings.

Keefe, Bruyette and Woods equity analyst Greig Paterson says: “This is a business where scale is a key competitive advantage, as the industry has low gross margins and is experiencing a technology arms race, and the merged company will see assets more than double.

“It could have a number one market share, allowing it to take advantage of baby boomer and defined benefit to defined contribution trends.”

But other analysts are more sceptical and question whether such a dominant market position can be sustained.

BNP Paribas equity analyst Alan Hughes says: “Pensions administration quality has never been a strength at Aviva, hence many of Friends Life’s schemes may choose to change provider, as the combined group is unlikely to have as high administration standards, a positive for Standard Life.

“The combined market position in projection is also unlikely to be retained, which is positive for Legal & General.”

The administration burden to combine the firms will be monumental and some worry customer service will suffer at the hands of integration.

Richard Jacobs Pension and Trustee Services IFA Richard Jacobs says: “Aviva’s heritage book is horrific and in a right mess. Goodness knows why it would take on a load more heritage non-computerised life policies.

“Friends Life is not the world’s best administrator either and has lots of other companies’ old policies thrown together. If there is one company that is struggling with its old book it is Aviva, so why they want to take on more I have no idea. It can only be really bad for consumers.”

Year of change

If 2014 was the year of regulatory and political shocks, then 2015 is when the hard work begins.

Auto-enrolment is rolled out to small firms, workplace pension charges will be capped at 0.75 per cent in April and radical new Budget freedoms are due to be introduced.

Analysts say Friends Life is more exposed than most to the risk of lowering the charge cap when the Government reviews the level in 2017.

And now there is the prospect of massive integration and upheaval at two of the market’s biggest players as well.

McPhail says: “Companies like Aviva and Friends Life are dragging along behind them the baggage of legacy systems from other takeovers.

“There will be huge work to do in the backdrop of auto-enrolment, RDR, workplace price cap and pension freedoms. There was a huge amount of work to do anyway and now there is a merger to apply retrospectively to backbooks and other companies’ systems.”


Both Aviva and Friends Life also have a huge presence in the UK insurance and protection market, and the combined group could come to dominate the sector.

Keefe, Bruyette and Woods says protection is a “high margin, high barrier” business and the merger could leave Aviva and Friends well-placed to attack the UK market.

There could be integration issues, however, with the two providers currently targeting different sectors of the market. Moneyfacts data, compiled for Money Marketing, shows Friends Life protection deals are consistently more expensive.

The following example sets out the monthly premiums on the cheapest life assurance over 20 years for a sum assured of £100,000.

For a 35 year old smoker with a single-life policy, Aviva charges £12.20 a month while Friends Life charges £13.94.

For a 35 year old smoker with a joint life policy, Aviva charges £20 a month while Friends Life charges £22.48.

Friends Life is more expensive in both scenarios if the person is a non-smoker.

Highclere Financial Services partner Alan Lakey says: “How does Aviva deal with these two conflicting plans? Friends Life operates at the quality, top end of the market whereas Aviva tried to strike a balance because it has many banks and building societies using its plans. Aviva is more interested in cost than quality.

“It suggests the quality of Friends Life products might be watered down to keep the premiums at a reasonable level.”


Experts say a £14.5bn Friends Life mandate won by Schroders earlier this year could also be in doubt if the deal goes through.

Most of the fixed income assets are managed in-house by Friends Life, but a £12.2bn multi-asset and equity mandate and a further £2.3bn in fixed income continue to be managed by F&C Asset Management.

While an agreement was reached in March to transfer the £14.5bn to Schroders by the end of the year, it is unclear whether that cash would be re-routed to Aviva Investors if the acquisition goes ahead.

Schroders are the second largest shareholder in Friends Life, so voting in favour of the deal may mean losing a multi-billion-pound flow of assets.

Schroders, Aviva and Friends Life would not comment.

Tilney Bestinvest managing director Jason Hollands says: “What does this mean for Schroders, who had essentially won those mandates? It all depends on what contractual terms have been signed and agreed and whether that can be unpicked and the assets moved over.”

Combining the two insurers will create the scale necessary to cut costs, with particularly the large fixed income assets offering significant sums of cash without the need to take on more staff, Hollands adds.

Chelsea Financial Services managing director Darius McDermott says Friends Life funds should benefit from the greater capability of the larger Aviva Investors.

“If they end up as part of a larger group there’s a chance of a better outcome for investors.”

Expert view

Friends Life, and its parent Resolution, has had more strategic twists and turns in its lifespan than Chubby Checker. First it was going to be a closed book consolidator, then it was going to do open funds, then international acquisitions, then it was split into ‘open co’ and ‘heritage co’, all amounting to a kind of hopscotch game from one strategy to another.  Over the last few years it has been a case of “I’m a shareholder, get me out of here”.

Meanwhile Aviva’s strategy had been all over the place, with various international businesses which nobody really understood. It was a kind of Frankenstein’s monster of life offices, what with the CU, GA, Norwich Union, Provident Mutual etc. It has had a job of work to bolt all this together.

Unfortunately this means if the merger goes ahead between Aviva and Friends Life there will eventually be a lot of broken bones in terms of headcount reduction. It will also be a big job to carry out a further integration of all the back book business Aviva and Friends Life are each carrying.

The deal may well present opportunities in terms of capital and tax efficiency to somehow make the numbers stack up. But these strategic wins by restructuring only happen once.

Following Aviva’s rash of acquisitions, at one stage it had over 200 systems to run the life business. When doing deals like this, you can end up with significant amounts of management’s energy and time getting bogged down in the stodge of integration. You cannot just leave it to rot, but these systems are not a piece of cake.

These things are a pain to undertake. Let’s hope Aviva has the stomach for it.

Ned Cazalet is chief executive of Cazalet Consulting

Insurer share prices rocket despite Budget pensions turmoil

UK insurers have seen their share prices rocket in the last 12 months despite a tumultuous year of political change and huge drops in annuity sales.

In the past year, the nation’s biggest pension providers have left the stagnating FTSE 100 in their wake, rising by up to 20 per cent.

After the Budget bombshell on pensions flexibility, the share prices at UK insurers tumbled for those reliant on individual annuity sales.

But Aviva, Legal & General, Standard Life and Prudential have delivered huge double digit growth to shareholders.

On 22 November 2013, Aviva’s share price was 439p but had rocketed 22 per cent to 535p at the close of markets on 19 November 2014.

Using the same time period, L&G’s share price was 212p rising 16 per cent to 245p, Prudential shares rose 19 per cent from 1265p last year to 1505p and Standard Life is up 18 per cent from 350p to 414p.

Friends Life’s share price has remained static over the year despite good results and is down 3 per cent from 345p to 336p.

Scottish Widows, part of Lloyds Banking Group, and Aegon have also seen their share prices hold steady.

Equity analysts predict new sales on individual annuities will drop 50 per cent this year and another 50 per cent next year – 75 per cent in total.

But big insurers who are not reliant on new annuity business can still churn massive profits from their existing books.

The UK has annuity stocks of around £200bn but in 2013, before the Budget, there was only £13bn of new annuity business.

Any decline in new business will have a more gradual impact as profits fall away over decades rather than the next few years.

For example, up to 25 per cent of L&G profits come from UK annuities but only 1 or 2 per cent of that was delivered by new business.

Deutsche Bank equity analyst Oliver Steel says: “The pension changes have seriously changed the model for the at-retirement market. The more reliant on individual annuities, the more likely you are to be hit. But assuming you were an asset-gathering insurer then you are likely to have gained.”

Sanford C Bernstein equity analyst Edward Houghton says: “Firstly, has the death of annuities been exaggerated? When we move into higher interest rates will people be tempted to by annuities again? Maybe.

”Secondly, will these companies be able to diversify? There is a huge potential bulk annuity market which should continue to grow as rates rise and deficits reduce on DB pension liabilities. Just Retirement and Partnership are inevitably looking at bulk as an alternative way of driving profits.”



What will Scottish devolution mean for pensions tax relief?

Proposals to hand the Scottish Parliament autonomy over setting income tax rates could have significant ramifications for pensions tax relief, Towers Watson warns. The Smith Commission, established to develop devolution proposals on behalf of the major political parties north of the border, says Holyrood should have the authority to set its own income tax rates. […]


IFS: Pensioner benefits to rise £12bn in a decade

Pensioner benefits will cost £12bn more in 2019 than they did ten years previous, the director of the Institute for Fiscal Studies claims. Writing in The Times today, IFS director Paul Johnson says funding defined benefit public sector pensions and the slow rise of the state pension age will cause bills to soar. He says: […]

David Gauke MP

Treasury refuses to review £2bn pension freedoms tax loophole

The Treasury is refusing to review possible tax avoidance from new pension freedoms, claiming it would be “counter-productive” to draw attention to loopholes. In a tabled amendment to the Taxation of Pensions Bill, published last week, Labour called for a review of pension freedoms next year focusing on possible tax avoidance. From April anyone aged […]


News and expert analysis straight to your inbox

Sign up


There are 13 comments at the moment, we would love to hear your opinion too.

  1. I remember an article once which mentioned Friends Provident were closing one of their southern offices in an effort to improve customer service and some wag suggesting that if they closed all their offices we would have a perfect service! These companies are dinosaurs with no interest in the customer and like the many companies which have been listed above (NU,GA,PM,etc) it may not be too long before they are extinct.

  2. Answer:

    Abysmal service
    Offshore call centres
    Just for starters

    Remember it took Norwich union over 10 years to integrate their legacy business – which is still not really complete. One wonders what a mess they will make of this.

    The City thinks it’s a lash up too. Shares fell heavily on Monday as the news broke. It looks like a disguised rights issue in attempt to put a sticking plaster on the dividend. The shares were at 532 on Monday 17th and at close on Monday 24 – 510 – a drop of over 4%. But compare that to the price back in June 2007 – 760! “Insurer prices rocket” What nonsense is that?

    Is it good for shareholders (the owners) – Well it’s probably OK for Cowdray, but as to anyone else it looks like the usual corporate hubris.

    Another good illustration as to why I will refuse to hold Life Office shares.

  3. We all know it will not mean better service, but its business and accountants a costs run the business world. This is most likely an unforeseen consequence of the charge caps being imposed and there for to both parties make sense. Low charges means less jobs and poor service, business fact of life. Its a shame.

    Both companies have issues with servicing their current books within a reasonable time frame. The merging of most likely three or four different software packages, less staff and new systems will cause many problems.

    Not long before we will only have the choice of three or four offerings just like the supermarkets. We will then see European life companies passporting in to UK, moving in with cheaper and better products with limited UK regulation, but higher charges.

    We sold the Gas, Water, Electric how long before the Bank of England is for sale, I’m sure the Germans would buy it.

  4. Two companies on my blacklist due to poor service history, at least I can shorten my list!

  5. One poor admin systems in a strange way could be better t two as at least if we call one, provided thye have access to both systems, we only have to call the one firm!

  6. Phil I love your optimism, your comment has made me smile, thank you. You have brightened up a challenging morning.

    Most likely one number, with twenty options, non of which will be the one you actually need, being told your call is important for 45 minutes and then told they cannot help, they don’t deal with this policy, will be the most likely outcome.

  7. I found a very easy solution to the problem some years ago. I moved all investment/pension business way from both of these providers as it took ages to get anything from them and regularly two sometimes 3 attempts to get the correct information. It has been better than 100% of an improvement, albeit I still get the occasional headache (as apposed to constant migraines from beating the old head off a wall). Over the years, as client reviews dictated I also rebroked protection business away from each of them too as the service for this was anything but good. I now have no business with either and will not be placing any business with either (or the one giant as it may become).

    In short I don’t give a monkeys what happens to them.

  8. It won’t be that simple Phil…
    “Thank you for calling Aviva, please listen to the following message – if you are a policyholder please press 1, if you are a financial adviser please press 2 – Thank you, if you are calling about your clients life policy please press 1, if you are calling about your pension please press 2, for medical please press 3 and for all other enquiries please press 4 – Please note all calls are recorded for quality and training purposes, please hold……………………………………………………. sorry we are currently experiencing large volumes of calls, somebody will be with you as soon as possible, please hold………………………………. …………………………………………………………………….. your call is currently in a queue, please hold……………
    ………………………………….. thank you for holding, if you haven’t lost the will to live yet please continue to hold …………………………………………………….. sorry our offices are open from 9am-5pm Monday to Friday please call back between these normal business times……..

    (don’t forget the lovely toilet music being played while you are holding)

  9. SWMBO used to work for Friends back in the days when they were proud of their Quaker roots, and poliyholders were their main concern. Then along came the bean counters and empire builders declaring that the market was king and the way forward to bright new horizons.

    With experience of disastrous similar events in the building society world I well recall saying it would all end simply in the Society (interesting isn’t it, the different connotations implied in that simple word “Society” rather than “Company” ) being subsumed into a commercial market driven organisation, where profit was the key criteria.

    Economies of scale are never as economic as envisaged, broad sweeping generalisations,are generally a triumph of optimism over reality – ignoring that the devil in the detail frequently scuppers the strategy. And each new empire builder that comes along always has to “make their mark” – generally consigning the lessons from the past to the “that’s old fashioned, nothing to learn there” bin. Thus of course ensuring that all those same mistakes, are duly repeated…..

  10. Martin Evans | 27 November 2014 10:55 am
    Victor M | 27 November 2014 11:22 am

    How reassuring these posts are-I thought it might be just me……….

  11. The headline asks – ‘What does it mean for Advisers’?

    The answer clearly is – Not a lot.

    The question might be – What are they for?

    Other than protection, I haven’t used any Life Office contracts for years now, and don’t expect to do so in the future, a strategy pursued I imagine by most Advisers.

    As for legacy business, where it could be moved at no cost or loss of benefit to the client, that was moved a long time ago.

    So, what are they now there for, and what are they to do? Further consolidation and reduction is inevitable, and the quicker the better. As one of the very few remaining ‘composite’ office of any size, Aviva is in a better position than most, but is struggling to compete in GI mass markets.

    Their day is done, the world has changed and continues to do so, and the ‘Life Offices’ have been left behind.

    As for the ‘good old days’, it was the complacency and hubris of Senior Management, and their failure to better plan and reserve for the future which in many cases helped their rapid decline.

  12. Job cuts disguised as rationalisation due to synergy within the ‘group’ which invariably means falling service standards.

  13. I was wondering about switching my pension from friends Life but am thinking maybe I should wait till after the Aviva takeover.

Leave a comment