Performance in 2008

Legal & General’s Savings business is essentially an asset-gathering and management business. Assets are held through product wrappers, such as pensions, investment bonds, unit trusts and ISAs which have different charging structures and tax treatments.

Assets under Administration (AUA) is a key measure of size and scale for our Savings business. As at the year-end, total AUA was £45.8bn (2007: £47.6bn), a decrease of 4%. During the year, the business added £400m in net new funds (inflows minus outflows), but falls in investment markets reduced AUA year-on-year.

New business sales were strong for most savings product lines. APE sales for Savings as a whole were £879m (2007: £893m).

Non profit pensions sales were strong, with APE of £328m (2007: £253m), an increase of 30% and we continued to see transfers of larger sums of pension savings as a result of the A-day pension reforms.

Sales of unit linked bonds, at £131m APE (2007: £251m) declined by 48% against the prior year. Changes in the Capital Gains Tax regime announced in 2007 and implemented in the 2008 Budget made bonds less tax efficient than unit trust investments in some regards and did lasting damage to this product.

Core retail sales of unit trusts and ISAs generated new business APE of £229m in 2008 (2007: £161m), a 42% increase against the prior year.

Sales of With-profits savings products were 16% lower at £191m (2007: £228m). However, With-profit bond sales increased from £10m to £28m during the year. Over five years to the end of 2008 the fund has delivered a 27% total return before tax. In 2008, assets backing the With-profits participating policies generated on average -18% return before tax and investment charges, compared with 4.5% in 2007. However, total With-profits policyholder bonus payments during the year increased by 4% to £689m (2007: £665m). As well as our usual year-end bonus announcement, an interim bonus announcement was made in response to the market turbulence in October 2008. This helped ensure continued fair distribution of funds to policyholders both leaving and remaining in the fund.

In 2008, With-profits savings APE of £191m accounted for 14% of UK new business APE (2007: 17%), with value added of £15m. The embedded value of the total With-profits business is £500m (£864m) net of tax before the shareholder transfer in the year of £77m.

Profit margins vary according to product. Margins in non profit pensions were -0.4% (2007: -0.8%), an improvement of 40bps. The change in pension margins during the year reflects the positive impact of the Suffolk Life acquisition and consequent increase in SIPP business written as well as enhanced efficiency across the business, offset in part by the negative effect of higher risk discount rates.

By contrast, margins for investment bonds were -1.0% (2007: 0.8%). This sharp deterioration in margin reflects higher unit costs following the Budget driven decline in sales of this product as well as a strengthening of our forward looking persistency assumptions.

Savings products can impose significant capital strain in their early years, and we increasingly aim to include a higher proportion of ‘capital-light’ products in the Savings business mix. During 2008, the average cash payback period for non profit bonds was 10 years (2007: 9 years) and was 12 years (2007: 13 years) for non profit pensions.

The growing proportion of SIPPs in our individual pensions business mix and the fact that 84% of corporate pensions new business is now fee-based, as opposed to commission-based, reduces capital strain.