Insurance firm Aviva (AV.) has attracted sharp criticism for a proposal to cancel preference shares worth £450m, news that also led to a big sell-off in preference shares from other issuers.

Aviva is planning to cancel its three outstanding issues of shares at par value despite the fact their high yields of between 7.875% and 8.875% had seen them trade at significant premiums.

Ordinary shareholders are expected to be asked to vote on the move. This has also been criticised as these shareholders are in line to benefit from increased income if Aviva doesn’t have to pay the fixed dividend on its preference shares.

Insurer Ecclesiastical Insurance Office and building society Nationwide have both said they will not be following Aviva’s lead and cancelling their preference shares.

Referring to Aviva’s governance statement which includes a pledge on ‘building trust’, Ecclesiastical, which itself has non-material holdings in the Aviva shares, says it ‘trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action’. (TS)

What are preference shares?

Preference shares are a type of equity which pays out a fixed dividend, usually twice a year.

The name ‘preference’ comes from the fact that they rank above ordinary shares when it comes to the payment of dividends and return of capital.

An ordinary dividend can’t be paid until preferred shareholders have been paid.

Investors have a choice of convertible preference shares, which convert into ordinary shares, and redeemable preference shares, where the initial investment is repaid.

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