Setting new standards - Friends Life

INTERNATIONAL LIFE & PENSIONS ASSET MANAGEMENT GROUP FINANCIAL PERFORMANCE
CONCLUSIONS AND OUTLOOK
Our view of the market
A strong stock market performance and the continued movement from final
salary to defined contribution group pension schemes helped the UK life and
pension industry to grow by 28% in 2006. The pensions market received a boost
as the result of the pension legislation changes that came into effect in April 2006.
Despite the increased public awareness of pension issues following the release
of the Turner Report, and the widely reported need for saving, we believe that
the market will remain predominantly supply led for the foreseeable future. Only
mortgage protection and annuity sales are likely to be consumer led to any great
extent. Financial intermediaries remain key to the future growth of the market.
Total UK Life & Pensions market
2006 £12.0bn
2005 £9.3bn
2004 £8.4bn
2003 £8.2bn
The graphs represent total industry sales in the UK
market as collated by the Association of British Insurers.
These are calculated using the traditional Annual
Premium Equivalent basis, which calculates new
business as 100% of regular premiums and 10% of
single premiums. Our primary measure of new business
is now the Present Value of New Business Premiums,
which is defined on page 16.
Protection – The housing market defied many experts’ predictions in 2006, setting
records for both price increases and mortgage advances. The protection market
reflected this only to a limited extent with a 2% increase in sales. The market seems
to have shrugged off recent interest rate rises. However, there remains the possibility
of further interest rate rises, and with the growing issue of first-time buyer affordability,
a slowdown or even a significant downturn cannot be discounted. We expect a more
subdued market in 2007, either flat or slightly negative.
Protection
2006 £0.8bn
2005 £0.8bn
2004 £0.9bn
2003 £1.0bn
Investments – A strong stock market performance in 2006 built on the recovery of 2005.
This drove a 27% increase in sales of investment bonds, which offer investors a simple,
tax-efficient investment vehicle, as well as being a useful Inheritance Tax mitigation
vehicle. The growth in the demand for account aggregation and open architecture for
funds has led to the development of wrap, a new form of investment trading platform.
We believe that use of these platforms will grow steadily and support the growth of
investment bond products. We expect market growth in 2007 to be in the range of
5-10%, although market turbulence, as seen recently, may concern retail investors.
Risks to this growth expectation are therefore largely on the downside.
Investments
2006 £3.0bn
2005 £2.4bn
2004 £2.2bn
2003 £1.8bn
Group pensions – The regulation changes in April had a significant impact in 2006.
Also, the financial risks and open ended obligations associated with defined benefit
arrangements have led many employers to move to defined contribution plans either
for all scheme members or just for new members. This continuing trend points to
significant growth potential within new defined contribution schemes over the coming
years. The trend away from trust to contract based arrangements is also continuing.
We expect market growth in 2007 to be in the range of 7-12%.
Group pensions
2006 £3.3bn
2005 £2.7bn
2004 £2.4bn
2003 £2.3bn
Individual pensions – There is undoubtedly greater public awareness of the need for
adequate pension planning following the media coverage of Lord Turner’s report on UK
pensions, and a significant part of the 47% growth in the individual market in 2006 was
triggered by A-Day in April. Whilst we believe that a major change in Government policy
will be needed to encourage the UK public to take pension planning more seriously,
we do expect the market for individual pensions to grow steadily. We expect market
growth in 2007 to be in the range of 10-15%.
Individual pensions
2006 £3.1bn
2005 £2.1bn
2004 £1.9bn
2003 £2.0bn
Post-retirement – The post-retirement market is currently not a significant area of focus
for Friends Provident, although we continue to be mindful of potential opportunities and
risks within it. In general terms, the next 10 years will see the post war baby-boom
generation reaching retirement age, and this will lead to growth in new and existing
post-retirement products. We expect market growth in 2007 to be in the range of 7-12%.
Post-retirement
2006 £1.2bn
2005 £0.9bn
2004 £0.9bn
2003 £0.9bn
Friends Provident Annual Report & Accounts 2006 13