On the face of it bringing L&P companies and books together should be a sure fire way to make a lot of money from rationalising the systems, reducing the staff employed in back offices and closing head office functions.
However time over time the benefits realised are far less than expected. You only have to look at the TCS acquisition of the Pearl’s business in their Diligenta vehicle or the Resolution acquisition of Lloyds Banking Group’s closed book L&P business to see that these acquisitions are not simple.
Why is this and what can Aviva do to learn from the past to ensure that they are more successful than others, including Friends Provident, have been at maximising the benefits of bringing Life & Pensions books and IT together?
Pragmatism is key to realising the benefits
By taking an altogether more pragmatic approach than their predecessors and taking more pain early Aviva has the opportunity to gain far greater benefits in the longer term than previous integrators.
One of the principal reasons that previous deals have proved to be more difficult is that they have looked at the consolidation of the L&P books as an IT Programme rather than a business programme. They have tried to answer the question how do I bend my existing systems to cope with the new products that I want to migrate onto my platforms?
However the question that they should be asking is a commercial one and that is what is the case for migrating any of the books onto the target platforms?
Pensions are different from other products
The problem is specific to the closed book Life & Pensions industry.
There is a big difference between pensions and other types of products. Most products have a shelf life that can be measured in months or at best a few years. The life of a pension product is measured in decades, theoretically for as long as the last customer is still alive. To add to this there are also lots of different variations of products. The reason for this is that pensions products are designed by actuaries. Actuaries are incredibly smart people who love to create complex mathematics models to calculate when customers are likely to die and therefore how to ensure that a product makes a profit by paying out less than it takes in contributions. The character of actuaries has led to them designing pension products that are esoterically pleasing to them, incredibly difficult to understand for the average consumer and highly complex which has resulted in nothing such as a standard pension. The low boredom threshold that actuaries have has resulted in lots of different products rather than sticking to a product that worked for most customers. This means that any Life & Pensions company that has been around for even a few years will have a large number of pension products and often (particularly for products that were created many years ago and where most of the customers have subsequently died) low volumes of customers.
The reason that these products are highly profitable is because they were designed to be complicated so that no normal customer would be able to understand how the products work, particularly how the charges are calculated and how much of the pension contributions that the insurance company retains.
The result of this is that in order to maximise the benefits from integrating the Friend’s Provident books Aviva should classify the books into three groups.
Books need to treated in one of three ways
The first group is those books which are either too small and/or too different from Aviva’s existing systems and requiring too much manual work to support to justify migrations. For the customers of these books Aviva should consider buying them out of the products or offering to swap them into a modern product. While this will cost Aviva in the short term it will both save them in the longer term and potentially buy them goodwill from those migrated customers.
The second group is those books which are too different from Aviva’s existing books but still have sufficient volume and generate sufficient cash. These books they should resign themselves to keeping on the Friends Provident systems and find ways to reduce the cost of running those systems through renegotiating terms with outsourcers or looking at alternative ways of supporting those systems such as in the cloud or paying on a process as a service (PaaS) basis.
The third group is those books which are sufficiently similar to Aviva’s existing books that the changes to the existing platforms will be minimal and the benefits of migrating them onto the Aviva systems significantly outweighs the cost of the migration.
Can Aviva learn the lessons of the past?
Of course the reduction in platforms and the rationalisation of back offices and call centres are only two of the primary drivers of benefits for the integration of Aviva and Friends Provident. There is also the rationalisation of Head Office functions which should release further costs.
However the primary reason that Aviva wants to acquire Friends Provident is the reduction of capital that will be required as a result of all the cash that the closed books of Friends Provident throws off. This will not be realised unless Aviva learns the lessons from the past and takes a very pragmatic, commercial approach to the integration accepting the financial pain in the short term will be worth it in the long term.