20 Assumptions

UK Assumptions

The assumed future pre-tax returns on fixed interest and [RPI] linked securities are set by reference to redemption yields available in the market at the end of the reporting period.

For annuities, separate returns are calculated for new and existing business. This reflects a change in investment policy applicable to the 2007 and later business, which has the aim of increasing the expected return whilst not increasing the level of asset risk compared with the historic policy. This has been achieved through improved investment efficiency and increased diversification through use of additional asset classes. The calculated return takes account of derivatives and other credit instruments in the investment portfolio. From the second half of 2007, some aspects of this revised strategy were also applied to the assets backing the in-force annuity business.

Where interest rate swaps are used to reduce risk, it is assumed that these swaps will be sold before expiry and the proceeds reinvested in corporate bonds with a redemption yield 0.70% p.a. (0.50% p.a. at 31.12.2007) greater than the swap rate at that time.

The returns on fixed and index-linked securities are calculated net of an allowance for default risk which takes account of the outstanding term of the securities. The allowances for default risk are set separately for the asset portfolios supporting fixed and index-linked securities, and average 0.11% p.a. and 0.12% p.a. respectively across the portfolios as a whole (0.11% p.a. and 0.10% p.a. at 31.12.2007). In 2008 Legal & General Pensions Limited has reserved an additional £313m before discounting to allow for our best estimate of the credit defaults over the next four years.

UK covered business

i. Assets are valued at market value.

ii. Future bonus rates have been set at levels which would fully utilise the assets supporting the policyholders’ portion of the with-profits business. The proportion of profits derived from with-profits business allocated to shareholders has been assumed to be 10% throughout.

iii. The value of in-force business reflects the cost, including administration expenses, of providing for benefit enhancement or compensation in relation to certain products.

iv. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses (excluding the development costs referred to below). These are normally reviewed annually.

An allowance is made for future improvements in annuitant mortality based on experience and externally published data. Male annuitant mortality is assumed to improve in accordance with CMI Working Paper 30, projection [MC], with a minimum annual improvement of 1.5% for future experience, and 2.0% for statutory reserving. Female annuitant mortality is assumed to improve in accordance with 75% of projection MC, with a minimum annual improvement of 1.0% for future experience and 1.5% for statutory reserving. In each case, the annual improvement is assumed to reduce linearly after age 89 to zero at age 120.

On this basis, the best estimate of the expectation of life for a new 65 year old Male CPA annuitant is 25.2 years (31.12.07: 25.1 years). The expectation of life on the regulatory reserving basis is 26.4 years (31.12.07: 26.2 years).

v. Development costs relate to investment in strategic systems and development capability.

International

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vi. Key assumptions:
	31.12.08 % p.a.	31.12.07 % p.a.
USA
Reinvestment rate	5.4	5.4
Risk margin	4.5	3.0
Risk discount rate (net of tax)	6.8	7.1
Europe
Government bond return	3.5	4.4
Risk margin	4.5	3.0
Risk discount rate (net of tax)	8.0	7.4

vii. Other actuarial assumptions have been set at levels commensurate with recent operating experience, including those for mortality, morbidity, persistency and maintenance expenses.

Tax

viii. The profits on the covered business, except for the profits on the [Society] Shareholder Capital held outside the long term fund, are calculated on an after tax basis and are grossed up by the notional attributed tax rate for presentation in the income statement. The tax rate used for grossing up is the corporate tax rate in the territory concerned which for the UK was 28% (2007: 28%). The profits on the Society Shareholder Capital held outside the long term fund are calculated before tax and therefore tax is calculated on an actual basis.