All is not well in the sleepy backwater of British preference shares.

Insurer Aviva Plc’s announcement last week that it may cancel its non-redeemable preference shares has caused consternation among money managers as well as individual investors, many of which hold the securities in their pension pots. The possibility that companies could redeem what were supposedly permanent securities with a high yield triggered a rout across the wider market.

Now God’s insurer (or at least the Church of England’s) has fought back. Ecclesiastical Insurance Office Plc said on Monday it has no plans to cancel its preference shares and delivered a not-so-veiled swipe at Aviva, whose preference shares it happens to own:

Ecclesiastical notes Aviva’s governance statement that “as one of the biggest companies in our sector, we aim to make our industry work better for everyone. That starts with us building trust with our customers, investors and shareholders by running our business honestly and transparently.” Ecclesiastical trusts that Aviva will follow the principles set out in that statement when considering whether to pursue this course of action.

This protest is important. Several institutions that own Aviva’s preference shares also hold the insurer’s ordinary shares -- and if they’re opposed to the cancellation plan, the company will have a fight on its hands to win the required shareholder vote.

Bear in mind that each pref share has four votes compared with one for each ordinary share -- and that the vast majority of preferred shareholders are likely to vote against the idea.

According to analysts at Stifel, Aviva may also have to get approval from 75 percent of preference shareholders to change the terms of the securities.

In any event, expect the lawyers to get involved -- as they did when Lloyds Banking Group Plc tried to cancel its so-called Enhanced Capital Notes.

Aviva doubtless feels that it has the right to retire expensive permanent debt and that the risks of doing so are small. If it needs permanent capital, the insurer could still tap the bond market -- which has so far been unmoved by the threat to the preference shares.

Preference shareholders, meanwhile, are increasingly concerned these securities aren’t as protected as they thought they were. Ecclesiastical’s shares haven’t recouped all of last week’s losses, despite the company’s assurances on Monday. The market just put a price on redemption.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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