Review of the Year
Operational Review
UK Annuities
Strengths and strategy
Our focus in the annuity market is on offering competitively priced annuities to customers who have saved for a pension with us.
Currently over 40% of our customers with vesting pensions buy a Friends Provident annuity. Under the new strategy, our objective is to increase the percentage of existing customers who purchase an annuity with us, and also to increase the number of potential vestings by growing the portfolio of group pension schemes and individual pension contracts that feed into the annuity business.
We also focus on maintaining and enhancing efficiency such that we can continue to offer competitive rates.
Market and outlook
Although the post-retirement market is currently not a significant area of focus for Friends Provident, other than as set out in our strategy, we continue to be mindful of potential opportunities and risks within it. In general terms, the next decade 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 2008 to be in the range of 7-12%.
Performance
New annuities APE written in 2007 was £27m, an increase of 7% in the year and representing over 40% of the value of vesting pension funds in the year. Contribution from new business was £13m. Margins were lower at 5.0% as assumed improvements to longevity were not fully compensated by pricing.
Cash generation was slightly lower at £15m, with the reduction in in-force surplus of £16m from reinsuring the in-force annuity business being largely offset by sharply lower new business strain from yield curve movements between the pricing and liability valuation bases. These factors led to IFRS underlying profit falling 43% to £12m in 2007. Looking forward, the in-force surplus will grow as net new annuities are added and new business strain will continue to be sensitive to changes in the yield curve. IFRS profits will therefore follow a growing trend with some volatility from period to period.
The new annuities sold exceeded those ceasing and hence the amount of annuities in payment increased by 16% to £150m p.a.
Key Performance Indicators
New business – APE
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Shareholder cash generation
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IFRS underlying profit
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New business – PVNBP
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Contribution from new business
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| Additional information | 2007 | 2006 |
|---|---|---|
| Amount of annuities in payment p.a. (£m) | 150 | 129 |