Lloyds' profits boosted by pre-RDR pensions

Lloyds Banking Group has stunned the market by reporting a pre-tax profit of £415 million for 2013, compared with the previous year's £606 million loss, despite a £3.5 billion provision for payment protection insurance (PPI) business.

Although underlying profit more than doubled to £6.2 billion, the top line was rescued by selling some family silver, including 102 million shares in St James's Placefor £394 million last March, a further 77 million shares for £39 million in May and a final tranche for £107 million in December.

The new auto-enrolment regime for workplace pensions drove profits at the group's life and pensions arm Scottish Widows where corporate pensions business climbed 21% as 300 new major employers were serviced.

The company also highlighted strong revenues from group pension business generated before the retail distribution review deadline at the end of 2012, a Buy-Now opportunity that not all insurance companies had a taste for.

In September the Office of Fair Trading (OFT) called for any group pension that still pays commission to advisers to be closed to new members joining through auto-enrolment, which could ultimately mean the dismantling of the majority of these schemes.

The Department for Work and Pensions is duly consulting on preventing such schemes being used for auto-enrolment. Their in-built adviser commissions are usually paid for by so-called Active Member Discounts, where once an employee leaves their job, their pensions charges rocket, a practice likely to be outlawed.

Otherwise, total pensions new business at Widows was £431 million, down from £519 million, but annuity sales were up, another potentially explosive mis-selling arena but one that affects most insurance companies to a broadly similar degree.

No financial advice

Overall, the life company arm saw sales fall 1% to £9.9 million, tempered by the bank's decision not to give financial advice to customers with less than £100,000 in assets.

Last week, the bank made an additional PPI provision of £1.8 billion, taking its total provision to almost £10 billion, part of the process for clearing the decks for a sale as soon as April, though there is no guarantee that this will be its last.

The government sold a 6% holding in the bank through the shareholding management body in September, while the taxpayer still retains a one-third stake. The expectation is that a tranche of around £5 billion will be sold in April, with some retail offering, but that a much larger tranche will be sold to retail investors in the autumn.

Should Labour win the 2015 election, however, it may legislate against banks of a certain size and force the group into a break-up.

Against expectations, Lloyds also said it will restart dividend payments, at a ratio of at least 50% of sustainable earnings in the medium term.

Chief executive Antonio Horta-Osorio is now in line for a £1.7 million bonus in shares, deferred for five years. The shares are already fully-priced, having risen by around 55% in the last year, and investors took profits this morning, taking the shares down over 4% to 80.18p in the first hour of trading.