THE impact of reforms in the pensions market hit the bottom line at Scottish Widows in 2016 despite its parent, Lloyds Banking Group, reporting a markedly improved performance for the year.

Pre-tax profits at Lloyds, which also owns Bank of Scotland, were up by 162.5 per cent, from £1.6 billion to £4.2bn, thanks in large part to the amount the bank set aside to cover payment protection insurance compensation falling from £4bn in 2015 to £1bn in 2016.

Edinburgh-based life and pensions business Scottish Widows, meanwhile, saw its underlying profit figure fall by 13 per cent to £837 million, with a note to Lloyds’ accounts stating that the “effect of recent reforms on activity within the pensions market” was to blame.

The way pension savings can be accessed was radically overhauled in April 2015. Previously all money saved into a workplace pension had to be used at retirement to buy an annuity that would pay an income for life. Under the changes, the options for anyone over the age of 55 include taking all or some of their pot as cash.

This resulted in the amount of money that Scottish Widows charged for running these pensions falling by 18 per cent in 2016, from £315m to £258m. On the flipside, income from Scottish Widows’ planning and retirement business grew by 52 per cent to £204m.

In the wider Lloyds group, income for the year fell by just under one per cent to £17.6bn, in part due to ongoing low interest rates.

Despite this, group chief executive António Horta-Osório said the business had “delivered strong financial performance in the year”, which allowed it to increase its ordinary dividend by 13 per cent from 2.25p to 2.55p and pay a special dividend of 0.5p per share.

The banking group’s share price reacted well to the news, opening three per cent up at 69p. They climbed throughout the afternoon to close at 70p. This will be good news for the group’s senior executives, who are to share an increased total bonus pool of £392.9m, which is paid mainly in shares. Mr Horta-Osório is to be awarded 956,416 shares while chief financial officer George Culmer, who is also a non-executive director at Scottish Widows, will receive 449,581 and chief risk officer Juan Colombás will get 452,212.

This is on top of respective base salaries of £1.2m, £764,070 and £753,458 and in addition to various other share packages.

Despite the improved performance, Mr Horta-Osório noted that Lloyds would be exposed if the UK economy was to slump in the wake of the country’s exit from the European Union.

“Given our UK focus, our performance is inextricably linked to the health of the UK economy, which has been more resilient than the market expected post referendum, with GDP growth of two per cent in 2016,” he said. “The UK’s decision to leave the European Union means the exact nature of our relationship with Europe going forward remains unclear and the economic outlook is uncertain.

“However, the recovery in recent years with low unemployment, reduced levels of household and corporate indebtedness and increased house prices means the UK is well positioned.”