There are two dominant attitudes to the concept of legacy in financial services. The first is the most obvious: whether through reputation or something for future generations to inherit, leaving a lasting footprint is valued by businesses and customers alike.
But the term is not always afforded this degree of sentiment when it relates to firms’ old books of business. As life companies are making clear, the need to keep pace with market evolution takes precedence over tradition.
Many life offices fell by the wayside at the start of the century. Those that have retained their prominence are, or have grown to be, some of the biggest players in financial services – largely by virtue of a diversified business model.
“The life company model, together with its products, thrived due to the commission-based sales force,” says Kusal Ariyawansa, chartered financial planner at Appleton Gerrard.
But larger firms have long since recognised there is little value in accepting new money into legacy products, and nowadays they are choosing not to administer them either. Household names such as Aegon, Legal & General, Prudential and Standard Life have sought to streamline business operations by selling off annuity books, insurance arms and with-profits divisions, prioritising asset management business instead. Table 1 shows how priorities have changed for the sector.
Table 1: Comparison of UK insurers’ financial assets by instrument, in £bn
Year | Currency anddeposits | Long-term UK government securities | Other debt securities | Equity | Investment funds |
2005 | 41 | 158 | 289 | 315 | 167 |
2006 | 42 | 146 | 300 | 326 | 188 |
2007 | 53 | 132 | 308 | 329 | 216 |
2008 | 58 | 145 | 319 | 235 | 183 |
2009 | 54 | 144 | 320 | 250 | 238 |
2010 | 41 | 148 | 300 | 247 | 267 |
2011 | 42 | 164 | 309 | 210 | 276 |
2012 | 42 | 149 | 344 | 221 | 319 |
2013 | 35 | 136 | 333 | 234 | 363 |
2014 | 33 | 141 | 353 | 225 | 399 |
2015 | 30 | 135 | 355 | 226 | 460 |
2016 | 29 | 145 | 400 | 229 | 517 |
Source: ONS. Copyright: Money Management
David Ellis, director at advice firm Gibbs Denley Financial Services, notes: “All businesses, big and small, need to look at how they operate. Much like small IFAs, they are having to look at what parts of their businesses remain profitable.”
For advisers and clients alike, the concern is whether service levels for legacy clients will be maintained once the books have been offloaded.
Mr Ellis says: “We understand why firms have sold their legacy business. However, it is sad to see household names go, and we are concerned that client service standards are likely to fall. In particular, we fear a loss of influence as we have no new business relationship with these new legacy providers and therefore no leverage when we are trying to sort out problems our clients are experiencing.”
Letting go of legacy
The sector’s shift towards new business priorities has been gradual, but over the past couple of years the process has accelerated. The £11bn merger between Standard Life and Aberdeen provides perhaps the clearest example of where the large insurers are headed. The newly formed company, Standard Life Aberdeen, is now the second largest fund manager in Europe, with £670bn in assets under management as at August 2017.
Standard Life’s insurance arm was then sold to Phoenix Group for £3.2bn in February this year, the Scottish firm lamenting the capital-intensive nature of such business. It says the deal will enable it to free up resources for other areas, chiefly asset management.
Others have gone down the same path. In March, Prudential sold its annuity business for £12bn to Rothesay Life – a firm that had previously purchased annuity books from both Aegon and Zurich. In the process, Prudential divided its business into two; M&G Prudential focuses on the UK and Europe, and Prudential now operates out of Africa, Asia and the US.
