Expected volatility is a measure of the tendency of a security price to fluctuate in a random, unpredictable manner. Expected volatility is determined by calculating the historical volatility of the Group’s share price over the previous ten years. The expected life has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.

The Group provides the following equity settled share-based long term incentive plans for directors and eligible employees:

Savings related share option scheme (SAYE)

The SAYE allows employees to enter into a regular savings contract over either three, five or seven years, coupled with a corresponding option over shares of the Group. The grant price is equal to 80% of the quoted market price of the Group shares on the invitation date. Options are normally forfeited if the employee leaves the Group.

The fair values of the SAYE options granted during the year have been estimated using the Black-Scholes model. The assumptions used in the model are shown above. The weighted average fair value of each SAYE option granted during the year was 30p (2009: 14p). The Group recognised total expenses of £4m (2009: £3m) related to the SAYE scheme. The intrinsic value of vested SAYE options was £nil (2009: £nil) at the year end. Intrinsic value of a share option is calculated as the current share price less the option price. The options outstanding at 31 December 2010 had a weighted average remaining contractual life of 3 years.

Company share option scheme (CSOP)/Executive share option scheme (ESOS)

The CSOP, approved by HMRC, and unapproved ESOS are designed to provide a long term incentive to directors and managers of the Group. The number of options granted is based on the manager’s grade, salary and performance. CSOP options granted until November 2003 and ESOS options granted until April 2004 have a ten-year life. In order for the options to be exercisable, Legal & General’s [Total Shareholder Return (TSR)*] must exceed the median TSR of the FTSE 100 for a period of at least three years commencing on the date of the grant. CSOP options granted in 2010 were provided in conjunction with certain awards under the Group’s Share Bonus Plan (SBP). These options have an average duration of 3 years and no associated performance conditions.

Options are normally forfeited if the employee leaves the Group.

Exercised during the year includes 9,563 of CSOP options linked to SBP which have been settled using employee scheme shares.

The fair values of the options granted under the CSOP and ESOS are estimated using a binomial model, reflecting the historic exercise patterns. The assumptions used in the model are disclosed in this section. No options were granted under these schemes during the period May 2004 to April 2010.

The Group recognised total expenses of £nil (2009: £nil) related to the CSOP and ESOS. The intrinsic value of vested share options at the year end was £1m (2009: £nil). The options outstanding at 31 December 2010 had a weighted average remaining contractual life of 2 years.

The CSOP options issued during the year were provided in conjunction with SBP awards described below. The fair value of these options has been included within the valuation of the SBP awards as they do not affect the benefits provided to the employee.

Share bonus plan (SBP)

The SBP awards restricted shares and nil-paid options. Recipients of restricted shares are entitled to both vote and receive dividends. Awards are normally forfeited if the employee leaves the Group. The fair value of the awards have been calculated as the market value on the grant date, adjusted to reflect the eligibility for dividend payments. A reconciliation of the option awards is presented below.

During the year, 10,879,874 shares (2009: 14,546,572 shares) were awarded under the SBP. The weighted average fair value of the shares issued was 86p (2009: 60p). The Group recognised a total expense of £8m (2009: £8m) relating to the SBP.

Performance share plan (PSP)

Conditional shares can be granted to top managers under the PSP, based upon individual and Company performance. Under the PSP, the number of performance shares transferred to the individual at the end of the three year vesting period is dependent on the Group’s relative TSR. The award will vest in full for upper quintile performance. One quarter of the award will vest for median performance. Awards will vest on a straight line prorated basis for performance between the median and upper quintile.

For awards made prior to 2008, the performance condition is based upon the FTSE 100. For awards made during or after 2008, half of each award will be measured using the existing FTSE 100 test, the remaining half is measured against a bespoke group of UK and European insurance companies. The group comprises all UK-listed life insurers that are constituents of the FTSE 350, plus all members of the insurance sector of the FTSE Eurotop 300. The two halves are measured independently, thus it is possible that one half may vest, whilst the other does not.

For both comparator groups, the companies used are members of the relevant indices as at the date of award.

Additionally, the Remuneration Committee assesses whether the underlying performance of the Company is reflective of the [TSR] result. In exceptional circumstances, the Remuneration Committee may exercise their discretion to scale back the vesting of awards, if it is felt that the Company’s performance did not justify the level of vesting. The parameters which the Remuneration Committee use in making this assessment include market share, partnerships gained and maintained, cost constraint, capital management and shareholder perception.

During the year, 12,221,575 performance shares (2009: 14,819,263) were awarded. The weighted average fair value of each award issued was 44p (2009: 41p). The Group recognised a total expense of £4m (2009: £4m) relating to the PSP during the year.

Employee share plan (ESP)

Under the ESP, approved by HMRC, permanent UK employees may elect to purchase Group shares from the market at the prevailing market price on a monthly basis. The Group supplements the number of shares purchased by matching the first £20 of the employees’ contributions. From time to time, the Group may make a grant of free shares. Both the free and matching shares must be held in trust for three years before they may vest to the employee. After vesting the shares remain within the Trust until they are transferred to the employee or the employee leaves the Group. The Trust is consolidated into the results of the Group with the unvested shares disclosed as employee scheme shares.

The fair value of the granted shares is equal to the market value at the grant date.

During the year, 5,614,056 shares (2009: 1,526,549 shares) were granted under the ESP. The weighted average fair value of the shares issued was 90p (2009: 60p). The Group recognised a total expense of £4m (2009: £5m) relating to the ESP during the year.

Total recognised expense

The total recognised expense relating to share based payments in 2010 was £20m (2009: £20m) before tax, all of which related to equity settled share schemes.

Total options

Options over 103,034,305 shares are outstanding under CSOP, ESOS, SAYE and SBP at 31 December 2010 as shown below: