Letter from the Chairman of the Remuneration Committee.

I am pleased to present the Directors’ Report on Remuneration for 2012.

OUR APPROACH TO REMUNERATION

Our remuneration philosophy applies throughout the Company and aims to fairly reward employees and recognise performance that is achieved against the backdrop of our Company values, taking into consideration our risk appetite and having due regard to customer outcomes. You can read more about our philosophy in the Policy Section.

We define core remuneration as base salary, annual bonus pay, and other benefits such as pension, car allowance, health cover and life assurance. In addition, for the executive directors, Leadership Team and other key employees there is a long term incentive plan – the Performance Share Plan (PSP). Participation in the PSP has been extended in the 2013 grant to include more employees in key roles below the executive directors as well as the Leadership Group. This includes employees in LGIM whose roles cross business divisions and whose participation encourages synergy and teamwork across the Company.

ANNOUNCED PLANNED RETIREMENT OF TIM BREEDON, FORMER GROUP CHIEF EXECUTIVE

During 2012, Tim Breedon announced his desire to retire at the end of the year. His early announcement allowed plenty of time for the Company to consider and appoint his successor. He remained as Group Chief Executive until the appointment of Nigel Wilson and then stood down from the Board on 30 June 2012. Between 1 July and 31 December Tim had specific objectives relating to Solvency II and a smooth handover to the new Group Chief Executive Nigel Wilson. He continued to be paid in line with our remuneration policy and contractual terms until he retired from the Company on 31 December 2012. The Remuneration Committee confirmed his good leaver status. His shares deferred under the Share Bonus Plan and other employee share plans vested in accordance with the rules of the plans. Awards granted under the PSP were tested at the date of his retirement in accordance with the plan rules and, to the extent that performance conditions were met, vested and were paid on a pro-rata basis. Please see the Implementation Section for more details.

There were no payments made outside of his contractual terms and the share plan rules.

The Committee would like to acknowledge Tim’s contribution to the Company and wish him the best in his retirement.

BOARD APPOINTMENTS

Nigel Wilson, formerly Chief Financial Officer, was appointed as Group Chief Executive on 30 June 2012. In line with our policy of base salary progression into new roles, Nigel’s base salary was set at a level that was £70,000 less than the former Group Chief Executive, Tim Breedon. Mark Zinkula, CEO LGIM, was appointed to the Board as an executive director on 18 September 2012. The Remuneration Committee carefully assessed his remuneration in relation to this role which is set out in more detail in the Implementation Section.

In November 2012, John Pollock and Mark Gregory increased their international responsibilities following a change to the management structure of our international businesses.

THE 2012 PAY REVIEW

In establishing its pay review budgets, the Company takes into consideration Company performance and the external market. The challenging economic environment continued in 2012 but the Company succeeded in meeting many areas of its plans. For 2013, UK core pay review budgets have been set at 2.5% for managers and staff grades across the Company including LGIM.

The Remuneration Committee takes into consideration the remuneration – base pay and annual bonus budgets – for employees below Board level when determining the remuneration for the executive directors.

BASE SALARIES

For 2013, base salary increases for John Pollock, Mark Gregory and Mark Zinkula are in line with the general base salary review budget for employees below Board level and they have each received 2.5%. When appointed Group Chief Executive, the Remuneration Committee agreed that the next base salary review for Nigel Wilson would be in March 2014, after he has spent 20 months in the position. His base salary therefore remains the same for 2013.

ANNUAL BONUS

The executive directors’ bonus awards are assessed by a combination of financial results against key Group performance indicators and the achievement of personal and strategic objectives. To calculate bonus in relation to 2012 performance, pro-rated salaries were used to recognise the changes to base salary that had taken place during the year. Under the bonus plans, awards of between 106% and 122.4% out of the maximum potential (125% of base salary) were awarded to the executive directors (including the former Group Chief Executive) but excluding the CEO LGIM who received 160.4% out of the maximum potential (175% of base salary). Tim Breedon’s bonus was assessed both on his objectives as Group Chief Executive for the period 1 January up to 30 June and on his specific objectives outlined earlier for the period 1 July to 31 December 2012. Further details of how these awards were determined are set out in the Variable pay and Termination payments sections. The Committee considers these levels of bonus to be appropriate in light of the strong results, in particular increases over 2011 in profit before tax and return on equity. The Group’s KPI results are shown in the Highlights section.

PERFORMANCE SHARE PLAN (PSP)

After due consideration of Company performance and other factors, it was considered that the appropriate level for awards under the PSP was 200% of base salary for 2013.

CLEAR AND TRANSPARENT REPORTING

During 2012, the Committee continued to contribute its views and pay close attention to the BIS consultations and outcomes on narrative reporting and executive remuneration. While there are a number of issues that are still under debate, we have decided to adopt some of the new guidance earlier than required to try and further enhance the reporting within this Directors’ Remuneration Report. We will have due regard to the ongoing discussions and developments during 2013 in order to become fully compliant with new legislation for our 2014 report. However, we have included two sections on Policy and Implementation which we hope will demonstrate our commitment to transparency of reporting, highlight our remuneration philosophy and help clearly summarise the key remuneration issues for 2012 and beyond.

EXECUTIVE REMUNERATION REVIEW – 2013 AND BEYOND

We believe that our remuneration structure should be closely aligned to shareholder returns and customer outcomes, reflect best practice and guidelines, be set against a backdrop of our Company values and risk appetite and take into consideration the economic environment. It also needs to be appropriately competitive in the market to allow us to attract and retain key talent. However, we do not believe in making ‘piecemeal’ changes on a regular basis. Our executive remuneration structure has therefore remained largely unchanged: Bonus potential has not increased for five years (since January 2008) and the long term Performance Share Plan (PSP) potential of 200% of base salary has been in place for nearly ten years (since April 2004).

During 2012, an in-depth review of executive remuneration structure was started with a view to further strengthening the alignment of business strategy and shareholder returns to executive reward. Our aim is to ensure we retain a simple and straightforward remuneration structure which can continue to be cascaded throughout the organisation.

We are also aware that further models and thoughts around executive remuneration structure are emerging from commentators and industry groups and we will take account of these in our thinking. However, we are mindful that some may bring conflicting objectives and the Committee will therefore continue to discuss and debate different approaches to compensation during 2013 and will have an open dialogue with shareholders.

Our intention is to have any reward changes that we consider appropriate in place for 2014; this will include a revised PSP programme as the current plan lapses in early 2014. This will form part of our consultation.

I sincerely hope you find this report of the Committee’s work comprehensive, clear and understandable. I hope you will support the resolution to vote for this Directors’ Remuneration Report.

RUDY MARKHAM
CHAIRMAN OF THE REMUNERATION COMMITTEE