Our scale and expertise in our major markets gives us the potential to accelerate our growth further, driven in part by social and economic conditions. Austerity remains the watchword in Europe, the US and Japan and continues to influence the spending decisions of both retail consumers and corporates.
Our focus in 2012 has been on:
- Retirement Solutions;
- Corporate Customer Solutions; and
- International Growth.
In addition, we are focusing on our digital capabilities in order to enable us to accelerate our evolution, giving us advantages in customer servicing and customer engagement and to help us build a more efficient organisation.
Greater longevity and ageing populations in most Western economies enables us to offer competitive and flexible solutions to employers and individual consumers to protect them from the consequences of death, disability or long-term sickness. Our expertise and market-leading positions in the UK also mean that we can export these skills and experience to international markets.
There is an unprecedented crisis facing traditional UK pension schemes. Not only are we living longer, but the fact that recent gilt yields have fallen below 2%, means that many UK companies are struggling to fund pension payments from their defined benefit (DB) schemes. The Pensions Protection Fund reported that the aggregate deficit for UK schemes covering nearly 12 million members was £245bn at the end of 2012. That’s an average of £39m for each scheme.
The UK’s largest 350 companies paid £20bn into their pension schemes in the year to 31 March 2012, with 40% of companies giving up more than a month’s earnings to meet pension obligations.
Innovative solutions to ensure UK pension schemes can meet their liabilities
We believe we are the market leader in retirement solutions, which helps DB pension schemes and their corporate sponsors increase the likelihood of meeting current and future liabilities.
We are well placed to provide solutions to help pension trustees pay current and future pensioners. Because of our diverse range of businesses and expertise, we can offer solutions to pension trustees that are specifically designed for them. Our businesses work together to ensure that pension scheme risk is managed in the most appropriate way.
Using insurance solutions to manage longevity risk
As well as managing investment risk, we help DB schemes guarantee pension payments through buyouts, buy-ins and longevity insurance. Our annuity and investment management teams work together to evaluate whether certain schemes can benefit from transferring to us the liability to pay future pensions.
In 2012, we took over the responsibility of paying the pensions for a number of UK pension schemes for a total value of over £1bn, including a £347m ‘buy-in’ for the Tate & Lyle pension scheme. We estimate that there are still £1.7tn of pension liabilities that could potentially benefit from a transfer. Similar funding problems for DB schemes exist in North American and European countries and we have been active in seeking opportunities in these regions.
We also help schemes remove the risk of their members living longer than expected through longevity insurance contracts. Earlier this year, we agreed a £3.2bn transaction with BAE Systems to remove the longevity risk associated with 31,000 pensioners.
Moving to defined contribution (DC)
As part of an overall pensions restructuring solution, we are also able to help UK companies set up new DC schemes. Where scheme trustees wind up their DB scheme, we have been able to help them set up a new DC scheme.
We attribute our success here to our expertise in providing competitive charging structures, our experience in administering workplace schemes together with our flexible range of workplace investment funds, including many diverse index tracker and fixed interest funds. In 2012, we helped a number of DB schemes reduce risk as well as setting up new DC schemes.
HOW WE EXPANDED OUR RETIREMENT SOLUTIONS
“Legal & General Investment Management (LGIM) is at the forefront in providing Liability Driven Investment (LDI) solutions for pension schemes, both in the UK and the US. The business has grown rapidly, with LDI AUM more than doubling over the last five years to £64bn.”
MARK ZINKULA, CHIEF EXECUTIVE OFFICER (LGIM)
Since establishing our first LDI mandate in 2001, we have built up a significant level of expertise in helping schemes match their liabilities to their scheme assets. Initially, we worked mainly with large-scheme trustees and advisers, using hedging instruments varying from traditional interest rate swaps and inflation swaps to more complex ‘non-traditional’ hedging instruments.
In the last year, we have developed a similar approach for our smaller and generally more governance constrained pension schemes and we will be rolling this out more widely over 2013. In the past these schemes have relied heavily on the results of their actuarial valuation every three years and have used the results of this to drive their investment strategy decisions. We can use our digital expertise to provide these schemes with more frequent online modelling which help them to understand the risk inherent in their assets and liabilities, thereby facilitating more timely reviews of their investment strategy. We are now leveraging our UK reputation and skills in the US market, winning both the UK and US LDI manager of the year awards.
CORPORATE CUSTOMER SOLUTIONS
Our aim as an employee benefits market leader is to help all types of employers develop flexible and affordable solutions that simplify the task of protecting and enhancing the financial wellbeing of their staff, both in work and after retirement.
Over the last year we have also developed a number of innovative solutions that help both large and small UK companies manage the consequences of long term staff sickness and help an employee’s dependants overcome the financial consequences of death.
Workplace Savings solutions
With the launch of the Government’s auto enrolment (AE) programme in October 2012, our strength as a provider of workplace schemes means that we are expecting over 500,000 employees to have joined our schemes through AE.
Since the roll-out of AE began in October 2012, we have been chosen by many well-known organisations such as Ladbrokes, the Co-op, Boots, Asda, Barclays, Thales, the National Trust, Marks & Spencer and the University of Nottingham.
Our proposition for these companies is at the forefront of the market, with competitive charging structures and a highly efficient managed service. Employers and their employees benefit from a complete end-to-end proposition, encompassing payroll integration, customer communications and flexible investment solutions, which use many of our low-cost funds developed by LGIM. Our innovative Mastertrust proposition is also an attractive option for employers seeking to reduce the burdens of complexity and governance overheads in their pension arrangements.
We have enhanced the facilities available on WorkSave, our digital corporate platform, to drive customer engagement, increase retention and build customer pension assets. The digital corporate platform enables access to educational resources and the opportunities that are available to them through the use of the online ‘Manage you account’ service. Account valuations, range of funds and planning tools are available to assist in planning their retirement income.
Extending the reach of Group Protection
We see helping employers keep their staff healthy as a key goal, which not only contributes to the growth of our own and our corporate customers’ businesses, but helps UK employees and UK society. We have developed a reputation for success in early intervention and rehabilitation treatments, which help long-term absentees return to work more quickly. Our aim is to help all types of companies to de-risk, by simplifying processes and cutting costs.
The role of our Group Protection business is to build solutions for our corporate customers, whether it’s specialist support for the complex requirements of a UK FTSE 100 company or a simplified solution for a small firm with as few as ten workers.
We’ve now developed a range of health and wellbeing initiatives, including:
- The ‘Healthy Living’ online health tool to encourage employers and their staff to assess, monitor and improve their health. This is available to over two million Group Protection customers.
- An enhanced employee assistance programme, with free face-to-face counselling for Group Income Protection customers and bereavement counselling for employees covered by our Group Life insurance policies and their dependants.
- Our stress in the City campaign aims to reduce stigma in the workplace related to mental health. We’ve partnered with ‘Rethink Mental Illness’ to support companies and individuals affected by mental illness.
We also use technology to make life easier for our corporate customers. Our recently launched new online ‘Quote and buy’ portal enables small and medium-sized businesses to benefit from our group protection products, helping them to manage staff who are off sick, and giving access to a free employee assistance programme as well as our ‘Healthy Living’ online application. In addition, we use online technology to make death claims quicker and easier. We are now also working on the technology to integrate this into back-office processes.
THE UNIQUE SERVICE WE OFFER EMPLOYERS
We are able to offer a unique integrated service for employers that no other UK financial services group can match. We have solutions for corporate schemes that cover pension saving, life assurance, income protection, investment management, annuities and pension scheme de-risking.
The scale of our corporate businesses and the synergies between them create benefits for employers, their staff and our businesses. Recent examples of our integrated approach are our desire to offer preferential rates on individual life insurance to members of group protection schemes and the simplified protection application processes for corporate customers who are already workplace pension customers, where life cover is linked to pensions.
In 2012, one of our strategic objectives was to increase the pace with which we diversify our business internationally. We had notable successes in meeting this objective. Firstly, our US protection business achieved 28% growth in sales and is becoming a more significant contributor to Group profits. Secondly, we managed to export the success of our investment management business into a number of important international markets, most notably in the US and Middle East, but also in Europe and Asia.
At the same time, we changed the management structure of our international businesses in France, the Netherlands and India to take advantage of the huge expertise and scale that exists in our UK savings and insurance teams.
In the US, we have built a reputation for high quality servicing and innovative solutions, by building superior insight into the needs of our customers and distributors. Our disciplined underwriting approach means that we can give very competitive products to those customers who pose the lowest mortality risks.
EXTENDING OUR US PRESENCE
The success of our growth into new markets comes in part from leveraging the strengths we already possess in the UK into international markets. In 2012, we gained regulatory approval to extend our existing capability in index funds into the US. And because we had a market-leading strength in pension de-risking in the UK, we were able to establish a position in the US as an industry leader in liability-driven investment strategy (LDI). Our long-established credibility and ability to drive thought leadership meant that we were the 2012 winner of the Asset International CIO Innovation award.
Our US insurance business has been transformed, becoming a vital part of the Group, sharing the same brand and commitment to the needs of customers. It has now become a major player in the US life insurance market, with a higher level of coverage than many well-known US brands. In 2012, we saw 28% growth in sales, in a relatively flat market and at a time when US middle class incomes were continuing to fall. Legal & General America now has the fifth largest market share out of term providers, with over 900,000 policies in force and total coverage of $500bn.