39 Share-based payments

The fair value at the date of grant of the equity instrument is recognised as an expense, spread over the vesting period of the instrument. The total amount to be expensed is determined by reference to the fair value of the awards, excluding the impact of any non-market vesting conditions. At each balance sheet date, the group revises its estimate of the number of equity instruments which are expected to become exercisable. It recognises the impact of the revision of original estimates, if any, in the income statement, and a corresponding adjustment is made to equity. On vesting or exercise, the difference between the expense charged to the income statement and the actual cost to the group is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital and share premium.

(i) Description of schemes

The group provides a number of equity settled share-based long term incentive plans for directors and eligible employees.

The Savings related share option scheme (SAYE) allows employees to enter into a regular savings contract over either three or five 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. Fair value is calculated using the Black-Scholes model.

Conditional shares can be granted to top managers under the Performance Share Plan (PSP), based upon individual and Company performance. Prior to the 2014 award, 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 Total Shareholder Return (TSR). New performance conditions attached to the 2014 award result in the number of shares being transferred being equally dependent on the group’s relative TSR and Earnings per Share (EPS)/ Dividend per Share (DPS) growth. In addition, the shares vest evenly over three, four and five years.

The Company share option scheme (CSOP), approved by HMRC, and unapproved Executive share option scheme (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. In order for the options to be exercisable, Legal & General’s 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. Fair value is calculated using a binomial model, reflecting the historic exercise patterns.

The Share bonus plan (SBP) awards restricted shares and nil-paid options. Recipients of restricted shares are entitled to both vote and receive dividends. Fair value is calculated as the market value on the grant date, adjusted to reflect the eligibility for dividend payments.

Under the Employee share plan (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 giving employees one free matching share for every one share purchased up to the first £20 of the employees’ contributions and one free matching share for every two shares purchased with contributions between £20 and £125. 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. The fair value of granted shares is equal to the market value at grant date.

The fair values of the share grants made during the year have been calculated using the following assumptions:

 

SAYE

SAYE

PSP

Award date

3-Sep-14

9-Apr-14

11-Jun-14

Weighted average share price

243p

213p

232p

Weighted average exercise price

191p

185p

n/a

Expected volatility

28%

31%

30%

Expected life

3-5 years

3-5 years

3-5 years

Risk free investment rate

1.27%-1.78%

1.10%-1.80%

1.25%

Dividend yield

3.9%

3.9%

3.9%

(ii) Total recognised expense

The total recognised expense relating to share-based payments in 2014 was £28m (2013: £23m) before tax, all of which related to equity settled share schemes. This is broken down between the group’s plans as detailed below:

 

2014
£m

2013
£m

Share bonus plan (SBP)

13

11

Performance share plan (PSP)

7

6

Employee share plan (ESP)

6

3

Savings related share option scheme (SAYE)

2

3

Total share-based payment expense

28

23

(iii) Outstanding share options

 

SAYE Options
2014

Weighted average exercise price
2014

CSOP/ESOS Options
2014

Weighted average exercise price
2014

SBP Options
2014

Weighted average exercise price
2014

 

 

p

 

p

 

p

Outstanding at 1 January

41,804,268

67

7,262,864

126

401,072

Granted during the year

5,387,224

188

1,688,881

212

189,185

Forfeited during the year

(969,983)

135

Exercised during the year

(25,003,593)

43

(3,562,693)

118

(37,738)

Expired during the year

(1,035,557)

116

(308,893)

148

(6,000)

Outstanding at 31 December

20,182,359

124

5,080,159

158

546,519

Exercisable at 31 December

195,759

70

35,293

85

Weighted average remaining contractual life (years)

2

 

2

 

8

 

Exercised during the year includes 3,562,693 of options, which were predominantly CSOP options linked to SBP which have been settled using employee scheme shares.

 

SAYE Options
2013

Weighted average exercise price
2013

CSOP/ESOS Options
2013

Weighted average exercise price
2013

SBP Options
2013

Weighted average exercise price
2013

 

 

p

 

p

 

p

Outstanding at 1 January

41,195,772

58

13,694,159

101

460,734

Granted during the year

5,166,415

147

1,244,272

169

165,400

Forfeited during the year

(1,151,667)

92

Exercised during the year

(2,861,483)

62

(7,131,655)

84

(73,402)

Expired during the year

(544,769)

74

(543,912)

105

(151,660)

Outstanding at 31 December

41,804,268

67

7,262,864

126

401,072

Exercisable at 31 December

100,433

78

41,007

85

Weighted average remaining contractual life (years)

2

 

1

 

8

 

Exercised during the year includes 5,709,328 of options which were predominantly CSOP options linked to SBP which have been settled using employee scheme shares.

(iv) Total options

Options over 25,809,037 shares (2013: 49,468,204 shares) are outstanding under CSOP, ESOS, SAYE and SBP as at 31 December 2014. These options have a range of exercise prices between 0p and 220p (2013: 0p and 170p) and maximum remaining contractual life up to 2024 (2013: 2023).