After months of discussion, LBG has decided to terminate a contract for the recently merged Standard Life Aberdeen to manage £109bn ($153bn, €123bn) of assets on behalf of the bank’s Scottish Widows insurance business.
The asset manager and the British retail bank agreed to discuss the future of their arrangement in the six months after the merger between Standard Life and Aberdeen was finalised.
When no agreement had been reached, Scottish Widows decided to walk away from its partnership with Standard Life Aberdeen and review its long-term asset management arrangements.
The fund group’s shares were rattled following the news, sinking more than 5% as trading began on Thursday.
Aberdeen began managing the LBG assets when it bought Scottish Widows back in 2014. However, post-merger with Standard Life, the unified group became “a material competitor” to the bank’s investment and pensions subsidiary, explained Antonio Lorenzo, chief executive of Scottish Widows and group director of insurance & wealth.
“Given the merger of Standard Life and Aberdeen has resulted in our assets being managed by a material competitor, it is now appropriate to review our long-term asset management arrangements to ensure they remain up-to-date and that customers continue to receive good service and investment performance,” he said in a statement.
“Therefore, we will begin an in-depth assessment of the market to identify a long-term strategic partner, or partners, to manage the current £109bn of assets.”
The Scottish Widows contract was not an insignificant one for the fund group, representing 17% of its total £646bn AUM. That said, it only accounted for 5% of the firm’s total revenue in 2017.
Keith Skeoch and Martin Gilbert, Standard Life Aberdeen’s co-chief executives, told shareholders that they were “disappointed by this decision” considering “the strong performance and good service we have delivered for LBG, Scottish Widows and their customers”.
“We will be discussing the implications of this with LBG and Scottish Widows,” the pair added.
Standard Life Aberdeen has said it will be taking a £40m impairment charge on “the intangible asset” relating to the LBG customer relationship.
Lloyds loss strikes ‘sour note’
Laith Khalaf, senior analyst at Hargreaves Lansdown, said that LBG’s decision to walk was hardly surprising given the rivalry between Standard Life and Scottish Widows, so “the prospect of one group managing the fund range of the other was never going to sit entirely comfortably in the corridors of power in Edinburgh”.
While “losing this book of business would strike a sour note for the Standard Life Aberdeen merger, and undermines some of the rationale for joining forces”, Khalaf said it’s worth noting that “the sort of funds involved are not run by the star managers of the stable, rather they are the sort of strategies that feature in older pension contracts sold under the Scottish Widows banner”.
“Lloyds and Scottish Widows now have 12 months to find a new home for this money,” he added. “You might think that with £109bn of assets on offer this might be an easy task, but these funds have to be managed at relatively low cost with enough margin for both the investment manager and Lloyds to make a turn. They will also find the field of suitors may be limited by the fact that some of the candidates come with the same baggage as Standard Life Aberdeen, namely a presence in the workplace pensions market.”
Lloyds could look to rebuild its own investment management capabilities, suggested Khalaf, but “12 months doesn’t give the bank a great deal of time to pull off such a big u-turn, having sold SWIP to Aberdeen only a few years ago, so this doesn’t look like a serious prospect for the time being”.