Aviva makes £700m pension pledge after profits surge

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The UK insurance giant Aviva became the latest company to pledge a significant lump sum towards its pension fund yesterday, saying it would wipe out about half of the scheme's £1.47bn deficit.

Aviva's pension deficit has rocketed by almost two-thirds over the past year, mainly due to the group's acquisition of the motor services group, RAC, which came with a £313m hole in its pension fund.

The group said it will pay £700m into the fund over the next two years, of which it hopes to fund about 12 per cent from its with-profits fund. However, the finance director, Andrew Moss, said the group did not feel the need to substantially increase its annual contributions, saying he believed the performance of the schemes assets would do most of the work in closing the deficit.

The news came as the company announced its full-year results for 2005, unveiling a better-than-expected 29 per cent rise in operating profits, sending its shares up 3.7 per cent to four-year highs of 820p.

The chief executive, Richard Harvey, said the group had decided to axe its policy of increasing dividends by no more than 5 per cent a year, announcing a dividend rise of 9 per cent for the full year. He said future dividend payouts would be calculated on the basis of maintaining dividend cover of between 1.5 and 2 times.

Mr Harvey confirmed the group was on the lookout for an acquisition, playing down suggestions that the company is set on pulling off its next deal in the US. "We're not committing to any particular geographical region," he said. "We're looking across the whole of the Aviva group - we operate in 25 countries now. We're ambitious to grow in Asia, the US and continental Europe, which have done well for us - so we'll continue to search for the best opportunities across all these markets."

Although Mr Harvey played down the likelihood of an acquisition in the UK, he said he would not comment either way on recent rumours that the group may be eyeing its largest British rival, Prudential.

At home, Mr Harvey confirmed that one of the group's focuses is a launch into the bulk-purchase annuity market - which is dominated by Legal & General and Prudential. He said the company would be likely to start off with a small deal. Commenting on the Government's forthcoming pensions White Paper, which is set to overhaul the UK savings market, Mr Harvey said he disagreed with Lord Turner's idea of a Government-administered National Pensions Savings Scheme.

"I don't think a centralised pension scheme is a good idea," he said. He added that whatever the outcome, he did not believe there was any serious risk to Aviva's business in the UK.