RISING FROM THE ASHES? An interview with Standard Life’s Trevor Matthews

It’s Standard Life but not as we know it

THE chief executive sat back in his leather office chair and rattled off some of the achievements his company has made over the past 12 months.

Despite axing 2,200 staff, the company is still attracting new customers on the basis of its market-leading standards of customer service. The chief executive is fully expecting a recently launched pensions product to attract £1 billion in new business in its first year, and the company’s investment arm has just passed the milestone of £100bn in assets under management.

But hang on a minute. Can the chief executive in question really be Trevor Matthews? Can the company to which he is referring really be the “beleaguered” insurance giant Standard Life? The answers are yes and yes.

Standard Life has travelled a long way since the events which insiders now refer to as “Ground Zero”.

On 13 January 2004 all bets were off on the future of the Edinburgh-based institution. It had been pushed into a corner by City regulator the Financial Services Authority. The onset of the FSA’s “realistic reporting” requirements, coupled with the stock market crash of 2000 to 2003 and, arguably, some strategic errors in the past, had pushed the company into a strategic cul-de-sac, from which there seemed to be limited chance of escape.

Standard Life was effectively forced to admit its strategy as a mutual lay in tatters. That strategy — implemented with aplomb by former group managing director Scott Bell — had worked spectacularly well during the long bull market in equities. The approach revolved around “buying” an increasing slice of the UK life and pensions market through very generous payouts to consumers and high commissions to the intermediaries who sell these products in the UK market, independent financial advisers (IFAs).

The company was able to do this because of its mutual status (there were no shareholders to keep sweet with dividends) and its cherished AAA status with ratings agencies Moody’s and Standard & Poor’s, which enabled it without jeopardising its solvency ratios to remain far more exposed to the best performing investment sector — UK equities — than its rivals.

But the scores of “pointy-headed” actuaries at the company’s Lothian Road headquarters seemed unable to predict the stock market crash of 2000.

What has been described by insurance analyst Ned Cazalet as “a massive punt on the UK equity market”, turned out to be too much of a long shot, particularly for the increasingly nervy regulator.

As the Oxford-educated actuary Iain Lumsden took over the helm from Bell in March 2002, the company’s financial position was already looking creaky.

Lumsden seemed reluctant to perform the radical surgery that was needed and after losing a heated dispute with the FSA, was forced to walk the plank after just 22 months — with his P45 reportedly delivered to his home by taxi.

Since that low point in its fortunes, a new management team — led by group chief executive Sandy Crombie, who had been on the insurer’s board since 2000 and has worked there since 1966 — has been tasked with picking up the pieces.

Crombie and Co have effectively taken the life and pensions giant back to the drawing board. Their key challenge is to persuade their 2.6 million “with profits” policyholders that it will be in their best interests to vote through a demutualisation next spring. Then they have to persuade the City of London that Standard Life will be worthy of investment as a plc.

One senior industry insider says: “To pull that one off, they’re going to have to move from a mutual mindset to a commercial mindset. That’s a massive task.”

So how well are Crombie and Matthews doing? So far, Crombie has earned brownie points for the way in which he has refreshed the company’s formerly rather inward-looking culture by bringing in fresh talent from outside.

The most notable hirings were Aussie-born Trevor Matthews himself — described as a globe-trotting insurance Mr Fixit — and Alison Reed from Marks & Spencer as finance director.

A lot of the old arrogance has gone.

One source at a rival insurer says: “Scott Bell and Iain Lumsden were pretty much stuffed shirts. Scott Bell was arrogant and he inculcated a culture that was arrogant and inward-looking. Iain Lumsden was abrasive and sarcastic. Sandy Crombie is certainly a big improvement. Trevor Matthews is like a breath of fresh air.”

Trevor Matthews says life assurer was insular and a bit arrogant

Trevor Matthews concedes that there were problems with Standard Life’s former culture. “It had been relatively closed to the outside world — a bit insular, and possibly a bit arrogant — and that’s been accepted by the current regime. But the people inside are quite open to new ideas and I think I’ve been received fabulously well. There are a lot of smart people who are very distressed about what’s happened to the company and are really keen to fix it.”

Following a strategic review — advised by blue chip advisors McKinsey, Watson Wyatt, Slaughter and May, and UBS — Crombie also decided to refocus the business on more profitable sectors of the UK life and pensions market. That means offering generous commission to IFAs to sell low-margin stakeholder products is out. He has also slashed costs — equivalent to around £100 million per year — by axing around 2,200 of the insurer’s 14,000 staff.

There had been fears from IFAs that the jobs cull would lead to a drop-off in customer service.

But Chris Megahey, a consultant at Scott-Moncrieff Life & Pensions, says: “Even with all the changes, it continues to stand out as the number one company for the administration of pensions. I suspected they would cut back on service but, to date, that hasn’t happened. Perhaps the people there were too comfortable in the past. So shaking things up could actually improve things.”

Trevor Matthews, too, is convinced that customer service has not suffered, despite the job losses and the trauma of January 2004. He says: “It’s in the DNA of the company. You ring up and someone actually answers the phone [as opposed to having to wait for hours and being routed through a range of options in a call centre]. I have sat with the kids in the contact centre. They do it well; they do it with enthusiasm, speed and accuracy. It’s classy stuff.

“Some of our competitors have brutalised their customer service by taking costs out and transferring people to India. We have no plans to do that.”

He believes that Standard Life can match them on costs, even without offshoring, as its call centre staff are more likely to get things right the first time.

Traditionally, Standard Life focused on selling through IFAs. But under Trevor Matthews’s leadership it is seeking to broaden its distribution net and recently signed a deal with Barclays, which previously had an exclusive tie-up with insurer Legal & General.

Standard Life has also signed multi-tie agreements with players, such as National Australia Bank, Thinc Destini and Sesame.

But the rebalancing of distribution is going to be evolutionary rather than revolutionary. Currently, the insurer does about 80 per cent of its UK business through IFAs and Trevor Matthews says this can be expected to fall to about 70 per cent over the next three or four years.

Trevor Matthews believes that despite the damaging spat over “realistic” reporting, Standard Life continued to do a lot of things right, even in its darkest days.

“Another positive I found when I got here was that the product development capacity is strong,” he says. “Good quality people had been working for a while in building the Sipps (self-investment personal pensions) proposition here for two or three years, and had spent tens of millions of pounds developing this thing.

Scott-Moncrieff ‘s Megahey adds that Standard has some new products in the pipeline that have “a lot of potential” and which are due to launched in the next couple of months. He says one is a “group Sipps product”.

Trevor Matthews sees Standard Life’s new Sipps as critical to the turnaround plan. He describes the launch last December as “probably one of the most successful new product launches ever in UK financial services”.

Matthews adds: “Some £600m has come through the door in the first half of the year, and we’re on track towards £1bn in the first 12 months.” The offering was recently enhanced by a “wrapper” tie-up with US-based fund manager Fidelity’s FundsNetwork, a funds supermarket service.

He believes that Standard Life is “uniquely placed to benefit from A-day” when the government will simplify the regulation of personal pensions in the UK.

However, Roman Cizdyn, analyst at Oriel Securities, highlights the fact that much of the Sipps business is “replacement business” rather than new business. Some existing customers with personal pensions at Standard Life are simply transferring their money into Sipps.

And another industry watcher says: “Despite this talk about Sipps, for the foreseeable future the foundation of Standard’s business is going to remain with-profits. But because of what happened — the with-profits fund was clobbered as the market fell and clobbered as the market started to recover through the enforced selling of equities — there are going to be continual noises-off from a bunch of disgruntled with-profit policyholders whose policies are due to mature in five, 10, 15 years time.”

Trevor Matthews concedes that bonus rates will have to keep coming down, despite the market recovery, largely because of overly generous payouts made in the past. He says: “We’ve said that, all other things being equal, we expect bonus rates to keep coming down, so we will almost certainly announce lower bonus rates than before at the next couple of declarations. That shouldn’t be a shock, as most of the others will be doing the same.” However, he may be underestimating the UK media’s attention span and penchant for bad news.

Trevor Matthews admits one weakness is in the area of cross-selling products to the existing customer base. The Australian says this remains “the holy grail” for financial services firms, but believes that Standard Life is well placed to offer more integrated financial products — using its bank, investments arm, life and pensions capability and Fidelity affiliation.

“Nobody’s really done too much of that. That’s a logical thing for us to do, ” he says.

Overall, he seems chipper and does paint a very rosy picture about how Standard Life has picked itself up and dusted itself down since the catastrophic days of January 2004. “I really do think the crisis is over, I really do think we’ve turned the corner inside the organisation, ” he says.

However, others are not so convinced. One financial source says: “Obviously they have an interest in painting as positive a picture as they can in the run-up to flotation. I’m sure that potential investors are at the top of their minds at the moment. They would hardly want to put out the message that they’re still in a mess. So you do have to take some of the positive messages coming out of Standard Life’s PR department with a pinch of salt.”

Jeff Prestridge, personal finance editor of the Mail on Sunday, says: “The new regime, led by Sandy Crombie, has done a good job at identifying the problems and starting to address them. But it’s a bit early to say a new dawn is upon them. As far as I’m concerned, they’re still in a period of transition. We need to see greater evidence that the changes are paying off — for example in the shape of new business figures.”

Oriel Securities’s Cizdyn agrees. “It’s impossible to tell how well they are doing until we see the half-year figures on August 23,” he says. “My impression is there is change. Crombie is a good guy, and is well into taking things forward. But it’s impossible to take a view about the situation at Standard Life until we see the figures.”

Standard & Poor’s now gives the insurer an A+ rating and in a recent note, S&P analyst Andrew Hughes wrote: “Standard retains a strong competitive position. However, the brand is in transition and the full impact is uncertain . . . as the UK position repositions, lower financial strength and commission reductions may continue to adversely affect sales volumes, as experienced in 2004. There is the potential for global new business sales to fall by 10 per cent in 2005.”

But will Standard Life thrive once it becomes a plc? Most people in the Scottish financial services industry hope it will and analysts say it is unlikely to be a takeover target as the UK life and pensions market is currently not seen as one of the world’s most attractive.

Many believe it is more likely that Standard Life will become predator rather than prey. Cizdyn says: “I’m sure they’ll be looking to use some of the money they raise at flotation to make acquisitions and increase their stake in overseas joint ventures.” The most likely areas to be targeted are the French market — where launch plans were scrapped in 2004 — and India.

But as a newcomer to the company, did Trevor Matthews have any reservations about hitching his wagon to a company that appeared to be in such dire straits? Apparently not. “From my first conversation with Sandy I could see there was massive change going on and I love change, ” he says. “I thought at that stage there was a good probability of success if I got involved. I saw it as very exciting, as an opportunity to help one of the big players succeed and, hopefully, have an impact on the market here. That was the appeal.

“The exciting thing for me is we can turn this company around. We are broadening distribution and, as a reasonable-sized player in this market, we can actually shape the market for the better. That is necessary, and we’ve got the opportunity to do that.”

This article was published in the Sunday Herald on 31 July 2005