At around 12.30pm on 19 March 2014, someone in the Treasury was making phone calls. Over the road in parliament, chancellor George Osborne was about to stand up to deliver his bombshell pension freedoms Budget.
Andrew Tully, pensions technical director at what was then annuity company MGM Advantage, picked up the phone. He had already received a call at 10.30 that morning informing him a market-sensitive announcement was on its way. The Treasury was now ringing again to give a fuller explanation as Osborne began speaking.
One man who did not receive a Treasury call was Steve Groves (pictured below), then chief executive of Partnership Assurance. Partnership was a listed enhanced annuity provider that had that very day posted a 2013 full-year operating profit of £131 million, up 17% on the previous year.
Its share price was about to fall by 56% as Osborne announced: ‘No one will have to buy an annuity.’
Groves received no prior warning. His day of annual results had begun with the usual stock exchange announcement at 7am, followed by media interviews, a presentation to analysts and then shareholder presentations. It ended with Partnership’s share price dropping like a stone.
‘It was an interesting day and it will always stick in my mind,’ Groves told New Model Adviser®. ‘We were in a meeting with one of our major shareholders when the announcement of the pension freedoms came out. [We] literally learned on the hoof.’
Merger in the making
Some would argue this was a brash way for Osborne to treat companies like Partnership, not to mention its competitor, annuity provider Just Retirement. Groves was a well-connected chief executive of a listed firm, seemingly kept in the dark on what was the hardest day of his career.
We pushed Groves on whether he knew anything of the announcement beforehand.
‘We definitely didn’t [receive a phone call], categorically,’ Groves said. However, he expressed no enmity towards the Treasury either.
‘I’m surprisingly philosophical about it,’ he said. ‘People think I will be more annoyed than I am. People elect governments to set policy. If that’s the policy the elected government wants to set then that’s for them to set.
‘My view is that it’s the wrong policy, and my job then [was] to react and to put Partnership back into what I [thought was] the right position.’
Groves spent the rest of that day explaining what the Budget meant to his shareholders. He was already working on a response plan when the sun set.
How soon did he know the Budget would result in Partnership and Just Retirement merging?
‘I thought it was the most likely outcome,’ he said. ‘If you’d have asked me that evening I’d have said it was 50/50 but it was the most likely option. It was intellectually the right thing to do.
‘You had a business that was selling x the day before the announcement and half x the day after. Just Retirement was in the same place as us.’
Groves said it made sense to combine the two businesses to create a new entity of a suitable scale. ‘That way you can trim the expense base and it’s the quickest and easiest way back to the right path for both businesses,’ he said.
The merger was announced in August 2015. It would result in Just Retirement shareholders owning approximately 60% of the combined group, with the remaining share held by Partnership shareholders. The new business would be headed by Just Retirement chief executive Rodney Cook (pictured above). Groves would step down once the merger was completed.
Obstacles to overcome
A tricky period followed in which the firms had to liaise while managing regulatory upheaval. There was also the prospect of the Competition and Markets Authority (CMA) blocking the road to completion.
The CMA eventually approved the merger, acknowledging the pension freedoms had ‘given rise to significant changes in demand for retirement income products’.
But Groves revealed this outcome had never been certain. Getting the merger proposal past the CMA was the trickiest part of the entire process, Groves said, and depended entirely on the authority’s view of the retirement market.
‘There were two areas,’ he said. ‘One was whether there would be a competition review of it, because the businesses were ranked one and two in the non-standard annuity market. It really depended how they defined the annuity market, whether they said it was [just a question of] non-standard annuities or the whole annuity market.
‘The view they took – I think quite rightly – is that post-pension freedoms our competitors were annuities, drawdown, cars and holidays, so that was one risk I thought would be a challenge.’
Groves added that this process was happening at the same time as Solvency II insurance directives were coming into force.
‘Neither party truly knew what their own capital position would be in two years’ time, let alone their competitors’,’ he said. ‘There was an element of just having to work together and trust each other for a period.’
How could two fierce rivals trust each other enough to work together?
‘The really tricky bit of it, if you’ll excuse the phrase, is when do you open the kimono?’ said Groves. ‘You don’t really want to show your competitor your secret sauce or your data until you know the deal is going to happen.
‘If the deal doesn’t happen, they can use what they’ve learned against you. When bringing two pretty fierce competitors together, that’s always the challenge.’
Groves has been a strong critic of the pension freedoms, often making his point on Twitter. He has taken gardening leave to reflect on the situation (while restoring vintage cars for auction).
In his capacity as the new chairman of annuity provider Key Retirement, he is focused on growing the equity release market ‘safely’. But he still takes particular issue with the problem of pension fraud.
‘I warned at the time that the pension freedoms would open the door to fraudsters,’ he said. ‘Prior to the pension freedoms there was very little pensions fraud.’
He said it had been rare because the money either had to be converted to an annuity with a saver’s existing provider or transferred to another regulated insurance company.
‘I said at the time that if you remove that requirement, people’s savings suddenly become really vulnerable,’ said Groves. ‘You should have approval of where the money should go, or you should have advice involved. We haven’t had that, and a lot of people have been duped.’
Freedom has its limits
Groves said policymakers still had a case to answer. ‘The pension freedoms in themselves were not necessarily going to cause this problem,’ he said. ‘The way they were implemented made it inevitable.’
He has been scorned for seemingly disagreeing with the principle of freedom and choice in pensions. But, he argues, to really exercise freedom, you have to understand what you are doing.
‘At the time I got a lot of grief from people saying: “How can freedom and choice be a bad thing?”’ he said.
‘In that case, you should take the fences away from the polar bear enclosure at the zoo and let people wander in because that would be freedom. Some choices are dangerous.’
Groves said to truly exercise freedom, savers need the knowledge to understand the decisions they are making.
He said: ‘Quite a lot of people are making those decisions without that knowledge at the moment.’