Royal London’s first half profits have been hit by the introduction of charge capping and other regulatory changes on defined contribution pension schemes.
The mutual life, pensions and investment provider’s European embedded value profit before tax was up 8 per cent year on year for the six months ending 30 June 2014 at £110m, before taking into account ‘exceptional items’.
One such exceptional item was the DC charge cap, with Royal London stating it was “adversely impacted” by a £61m “assumption change” from this, meaning it ended the first six months down 45 per cent at £139m.
In March, the Department for Work and Pensions revealed that workplace pensions will be subject to a management charging cap of 0.75 per cent from April 2015.
Earlier this year, Aegon UK warned the charge cap imposed by the coalition government posed a real threat as it estimates a hit of £20m to £25m a year, equating to more than half of the profits for this year at its current run rate.
Phil Loney, group chief executive at Royal London, said the first signs were showing that the government’s charge capping and other reforms will have precisely the opposite consequence to what is intended.
He said: “We believe that this government intervention will only distort a market that was already moving in favour of lower charges for pension scheme members due to scale economies from auto-enrolment.
“Future governments should focus on increasing the onus on employers to regularly shop around the market for the best deal on offer rather than focus on centrally fixing market prices, which acts to reduce competition.
“Pensions minister Steve Webb told parliament that pensions companies’ total revenue would be reduced by £200m over a 10-year period.
“The provisions for the pension charge cap that we have seen from pension providers during this reporting period suggests that this is a gross underestimate. We estimate that the total reduction in long term insurer income may well reach £1bn.
“This seems to me to be an unacceptable margin for error in the government’s understanding of the impact of its actions and the size of the impact is driving many insurers to introduce employer fee arrangements to mitigate against the impact of further reductions in the price cap.
“I hope that present and future governments will think carefully about these consequences before lowering the cap further, not least because the impact of price capping is likely to fall increasingly on the hard pressed SME sector.”
The firm’s protection business was also down 33 per cent at £161m.
However, the group said there was not a like for like comparison as last year’s business was buoyed by the spike in demand created by the removal of gender-specific pricing.
Royal London stated that it continues to invest in service enhancements and product improvements to increase future protection market share.
On the upside, individual pensions grew 15 per cent to £609m and drawdown was up 19 per cent to £358m.
Mr Loney stated the firm was a market leader in the external linked free standing drawdown market, with a 72 per cent share.
He said: “The freedoms announced in March’s Budget are likely to make drawdown in all its forms a far more popular method of generating an income in retirement than it is currently, which will put us in a particularly strong position.”
