Alex Beveridge talks to Trevor Matthews, CEO of Friends Provident, about how UK life companies are set to survive the economic slowdown, their push into the Middle East and the unsolved issue of means testing
Alex Beveridge: What is your view on how Personal Accounts in the UK have progressed?
Trevor Matthews: We still have the two fundamental problems which we have not solved and which the government hasn’t wanted to talk about, the first of which is means testing. (If the level of pension savings is deemed too high that person may miss out on State Benefits that they could have claimed.) Right from the beginning I have said that this will not work unless we solve this means testing problem.
The latest information is that the report the government was going to do to analyse this problem has been deferred to next year, so that is far from satisfactory.
The second problem is levelling down. I do think there will be some and that is a concern. We need to be working hard as an industry to encourage employers to maintain their good quality schemes.
Alex Beveridge: What will the financial crisis mean for life companies?
Trevor Matthews: First of all life companies are different to banks. They don’t borrow short, they are long term savers, they match their assets and liabilities. They learnt a lot from the solvency crisis of 2001/2002. I think the FSA did a good job here forcing life companies to look at their business realistically and I think the FSA leads the world on issues like this. So all life companies should have good protection against solvency shocks and should have had plans in place to de-leverage and/or hedge their equity portfolio. Our company, for example, has done that. We sold equities as the market went down, it was all very orderly.
Alex Beveridge: What about capital adequacy issues?
Trevor Matthews: Well it is fine for us. We published a surplus of a billion pounds on 30 June and it was still a billion at 30 October. That is because we got out of equities last year, so our capital adequacy is not a problem. If the market continues to tumble, then I think some companies could be under pressure.
I think the regulator is quite pragmatic about this. It is not going to sit there with rigid rules and force companies over the brink if that is not appropriate. It is a tense time but I am quite relaxed.
Alex Beveridge: There have been some widely publicised issues with Friends Provident.
Trevor Matthews: It’s a really interesting turnaround story that several other companies have also been through. Prudential said back in 2003 they did not have to cut their dividend and did not have to raise extra capital – they ended up having to do both and lost their chief executive in the process. Aviva cut their dividend.
This was all because of the change in writing with-profits business. Companies in the UK have written with-profits business for much longer than those in other countries.
With-profits is quite convenient, all the money goes in one big fund, it sloshes around a bit, the claims go out and the shareholders take the profit out. Some of those funds were a hundred years old, they had a surplus in them. With the collapse of the markets and the collapse of the sale of with-profits business in 2002/2003 you found companies increasingly wrote business outside their with-profit fund but then had to come to grips with the fact that they need to finance their business.
When I got to Standard Life in 2004, a lot of people said “will this company ever have enough cash to pay a dividend going forward?” We did. This is the same problem that Friends Provident has had and we have had to make changes. We will stop paying commissions on the regular premium pensions. That is a cash hungry business and I don’t like it. I stopped doing that at Standard Life in 2004. You’ve got to take out the cost of writing the business, change the infrastructure, scale down and take the painful decision of slashing the dividend in half. If we do all this, over the next couple of years, we should get to the position where there is enough coming out to give us money to write new business and pay a healthy dividend going forward. I don’t think anyone can argue with that.
We are really going to be focusing on the pension business going forward. It is a good business and I believe passionately in it. I’m keen to see us really move forward in the corporate pensions space and make sure we are seen as leading the way in terms of products, services and thoughts.
Overseas, we have Friends Provident International. This is the old Royal Sun Alliance business, which the company bought in 2002. This means that now we can pick up products from the UK and push them into appropriate overseas markets. We have done this a number of times and the best example is a group savings plan called Optus that we are launching in the Middle East.
In the Middle East, they don’t have pensions, but they have a gratuity system. So if you leave a company, after you have been there a number of years the company has to pay you up to a year’s salary in cash. It’s like a mini defined benefit arrangement.
So we picked up our pensions system here and transferred it to the Middle East. It is only very early days but it is really exciting.
Alex Beveridge: How are things going with F&C?
Trevor Matthews: We are in the process of de-merging F&C. This will take us to the middle of 2009. We have had renewed interest in F&C, so it might still be sold but if we can’t get a satisfactory deal, we will push ahead with the de-merger.
However, we don’t need to sell this business to make the financial strategy work.
Alex Beveridge: What about industry consolidation? There were some people who were looking to buy Friends Provident most notably JC Flowers? They could start looking again.
Trevor Matthews: Yes they could and we can’t prevent that happening. Mr. Flowers could have come back on the 18 October, he didn’t.
Alex Beveridge: You were pleased about that?
Trevor Matthews: Well yes, because I have job to do to get this company going and it would be a bit of a nuisance to be interrupted right now. We will do whatever is right for the shareholder and if a big offer comes along then of course we will have to look at it.
However, our job is to focus on the business and build it up so it is a strong solid operation.
What I can say though is that I am going to work hard at this group pensions business, because it is very important to us. If the company is ever taken over, that will be one of the reasons, because it is one of the jewels in our crown.
Alex Beveridge: Will be there be any more job cuts?
Trevor Matthews: We can’t say never ever. When I got to the business at the beginning of last year, they said there would be around 600, and we got through with around 450.
There is no massive rationalisation planned, but we will keep control of staff numbers, there is no doubt about that.
We have promised expense reductions in the order of 40 million or so and we have said a couple of weeks ago that we are well on track to do that.
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