Nucleus' Ferguson: Where now for life companies?

Nucleus CEO David Ferguson assesses the future role of life companies in the wrap arena.

The recent round of life company results has thrown up a number of fascinating figures, many of which appear to contradict and almost none of which really seem to make sense.

I guess it is pretty easy to observe that the boom days are behind the sector and also that whether one measures performance on an IFRS or an embedded value basis the numbers just ain't as good as they used to be. There also seems to be an almost universal acceptance that the old way of doing business is confined to the past and the future will be a lot less capital intensive. Quite how that squares with some of the RDR gnashing of teeth is anyone's guess but in any event it seems to be just true.

My big question is where do these companies go next? If they are not going to invest heavily in commission-hungry saving and investment products and assuming they wish to remain open to new business the only viable options appear to be in the annuity market or in the platform space.

Now the annuity market, variable or otherwise is a rather complex place to be if one does not have one's wits close to hand. The traditional sector is fraught with corporate-bond related difficulties and huge concerns over managing longevity risk while the variable market continues to cough, splutter and toil towards any kind of critical mass following the withdrawal of The Hartford and the demise of Aegon UK's ever-so-trendy sounding Five-For-Life. These products continue to be considered complex and the associated guarantees are widely perceived to be expensive.

Moreover these products seem to break sharply from the bespoke world of platforms and instead hark back to the days of one-size-fits-all with-profit arrangements. The product is also at odds with the growing trend for financial planning and accordingly it is likely to be many years (if ever) before we will have a significant variable annuity market in the UK.

All of which leaves the platform space as the only place to be on the so-called provider side of the industry.

Now while to date (and as a group) the UK life sector has achieved only limited penetration of the platform market and seems to have invested an inordinate amount of capital getting there, one has to imagine that this curve will turn sooner rather than later.

Of the traditional life companies only L&G - through its stake in Cofunds and Standard Life - appears to have a credible proposition which has attracted any kind of scale and alongside Skandia seems remotely well positioned to move from here (apologies to Ascentric if you consider yourselves to be a mainstream UK life company platform). Even of this trio, it is only Standard Life that are playing reasonably successfully anywhere close to the more transparent, and as far as I can make out, more rapidly growing wrap space which seems set to supercede fund supermarkets as the dominant type of platform.

I know some commentators seem reluctant to distinguish between platform types but as I am a simple man I prefer to start with trying to understand who is paying for the service being provided.

In the supermarket model, the platform revenue is generated by charging asset management groups for distribution - this charge can sometimes be tiered according to the size of fund group and in any event will result in an available asset universe (and thus client choice) of those asset groups willing to cede margin to the supermarket. In the wrap model, the service is quite clearly (in most cases) paid for by the client who in turn has access to a completely open universe of assets unconstrained and unhindered by the commercial agenda of the platform.

Ultimately, if one believes in a more transparent open future it is wraps that are going to win. The wrap train has started running and as far as I can gather is the only part of the UK provider market that is thriving. It is also most aligned with the only part of the UK advice market that is booming. This is not a coincidence!  What is less clear is what role the UK life sector will have and how sensibly it might carve out that opportunity from here and in turn what impact it might have on life company results over the next 5-10 years.