I am pleased to present the Directors’ Remuneration Report for 2010.

In determining remuneration levels, the Committee pays close attention to the performance of the Company, external market conditions, and its overall responsibility to shareholders within a framework of good corporate governance.

During 2010, the Committee undertook a thorough review of the structure and shape of the executive directors’ remuneration. The review highlighted that, while certain elements of the directors’ remuneration were below the mid-market ranges of other FTSE 100 companies, it was felt that the overall structure of the package remained sound. In an environment where there is continued focus on levels of remuneration within the banking and financial services industry and where the future regulatory regime remains unclear, the Committee also felt it was important to clearly differentiate Legal & General’s responsible and prudent approach to reward and, therefore, felt it inappropriate to make any significant changes at this time. The existing structure will thus continue for the directors during 2011. However, the Committee will continue to review the framework of directors’ remuneration during 2011 with a view to making appropriate change in respect of 2012.

2010 has seen a number of corporate governance guidelines issued in the aftermath of the financial crisis, in particular the FSA’s response to the Capital Requirements Directive (CRD3) and the likely extension of these principles to insurance companies through [Solvency II]. Legal & General strongly supports, and complies with, the principles of good remuneration governance and is committed to consistent application of sound risk management controls. However, we do feel it is important to recognise that guidance resulting from the financial crisis should take into consideration the different business models between credit institutions and the investment management and insurance firms.

The year also continued to see fluctuating and volatile market conditions. However, the Company has succeeded in performing strongly within this challenging environment and the year-end has seen a strengthening to its position and outperformance of its plans in many areas. Nevertheless, the Company has continued to take a prudent approach to increasing levels of fixed pay. It has also emphasised the importance of having a strong and ongoing link of performance to reward.

In determining levels of remuneration for the executive directors, the Remuneration Committee also considered the pay and bonus budgets for employees below Board level. Against this backdrop therefore, executive directors’ salaries have been reviewed and adjusted in line with the budget agreed for employees throughout the Company below Board level (around 2.9%) or in line with our policy of progression towards mid-market where appropriate. Under the annual bonus plan, bonuses of between 73% and 90% of the maximum potential (125%) were awarded to the executive directors. Further details of how these awards were determined are set out in the Remuneration package for executive directors section. Performance Share Plan awards at the normal level of 200% of salary were also agreed for 2011.

As stated above, the Committee takes seriously the issue of balancing risk and reward, an area that continues to receive much scrutiny by regulatory authorities. During 2009, a Bonus Steering Committee (BSC) was established to review any proposed new bonus schemes and any changes to existing schemes throughout the organisation below Board level to ensure they support business strategy and do not encourage any inappropriate risk taking. Scheme metrics, the quantum of potential award and eligibility to participate (in relation to participants below Board level) are also reviewed to ensure they continue to be appropriate. The BSC reports to the Remuneration Committee. The Remuneration Committee retains ultimate approval for all bonus plans across the Company and has the final discretion as to how they are applied. The BSC continued to meet regularly throughout 2010. In December, the Director of Risk and Compliance made an annual report to the Remuneration Committee on behalf of the BSC to confirm that no material risk had been taken with respect to bonus schemes paying in relation to 2010 and that all bonus plans for 2011 had been reviewed. The Group Chief Risk Officer (CRO) is also a member of the BSC.

The Remuneration Committee met in early 2011 to consider the impact of the revisions to the FSA’s Remuneration Code published in late December 2010 and which took effect on 1 January 2011. The Committee has concluded that, although insurance businesses are not caught, the Group’s asset management business (LGIM) and retail investment business are categorised as Tier 4 firms. The Committee has identified all Group companies affected by the Code and identified those staff who are within its ambit (Code Staff). The Committee has extended its terms of reference to include these individuals.

The Committee is satisfied that no significant changes to remuneration practices will be necessary and is considering how best to meet the new disclosure obligations.

The Company also appointed a Group Chief Risk Officer (CRO) in July 2010. The Remuneration Committee felt that while the CRO should continue to participate in the long term incentive plans, with vesting a function of the long term performance of the Group, eligibility for short term bonus should be determined by reference to performance against personal objectives set to underpin the independence of the CRO from day to day business pursuit. Performance against these objectives will be reviewed by the Chairman of the Group Risk Committee. This will form a key input to the final decision on reward that will be made by the Remuneration Committee. The same approach to bonus will be applied to the Head of Internal Audit, whose objectives and performance will be reviewed by the Chairman of the Audit Committee, and the Director of Regulatory Risk and Compliance, whose objectives and performance will be reviewed by the Group Chairman. The principle of only looking at personal objectives will also cascade to their teams.

Following the Government’s review of pensions legislation in relation to the Annual Allowance and Lifetime Allowance, the Remuneration Committee considered the impact on the small number immediately affected by the legislation. The Company does not compensate for legislative changes but the Committee endeavours to provide employees with as much information as possible to make informed choices and decisions. No special compensation is being offered to directors or any other employees who are affected by the tax changes but should any impacted employee wish to leave their pension scheme, a cash alternative equivalent to the current level of contribution given under the Company’s Defined Contribution pension scheme will be offered. In line with Government legislation, no changes will be made to those directors (Tim Breedon and John Pollock) who took protection under the A-Day legislation.

In my letter introducing the 2008 Remuneration Report, I mentioned that the table of pension entitlements in that year’s report showed a larger increase than may have been expected as a result of changes in actuarial assumptions. This year’s report actually shows a negative number. Neither arise from any change in policy or the underlying benefits but demonstrate the volatility associated with the assumptions we are required to use.

The Remuneration Committee’s remit extends beyond the executive Board members. It reviews the ongoing pay and bonus decisions on an individual basis for any employees who earn a base salary of £100,000 or more. It also reviews the overall pay and bonus decisions in relation to the oversight functions (Risk, Compliance and Internal Audit), and also Finance and Human Resources to ensure that decisions are not biased depending on reporting lines to either the business or functional head. An equal pay audit is conducted before, during and after each pay review and looks at pay and bonus decisions by gender, ethnicity, age and full time versus part time employees across the Company. The results of this audit are reviewed by both the Equalities Committee and the Remuneration Committee. Pay and bonus budgets for all employees are approved at the Remuneration Committee and the Committee is mindful of these in determining pay and bonus for directors.

The Committee strongly supports the Company’s stance on linking performance to reward and is pleased to see the introduction of more specific performance ratings to all staff (in addition to managers) during 2010. For 2011, the performance cycle for all employees has been aligned to the annual business performance cycle to more closely link objectives and performance with Group results.

A resolution to vote for this Directors’ Remuneration Report will be put to the AGM. I hope that you will support this resolution.

SIR DAVID WALKER
CHAIRMAN OF THE REMUNERATION COMMITTEE