The world is getting older and people are living for longer. Individuals generally have not saved enough during their working lives, underestimating their outgoings in retirement, life expectancy and the cost of care. Many pensioners will need to rely increasingly on alternative sources of finance to fund this 'savings gap'. The over 60s in the UK are estimated to have some £1.4 trillion of housing equity and we expect increasing numbers of retirees to use this equity to supplement their retirement income.
Ageing populations at the same time expose corporate balance sheets to earnings volatility caused by predominantly legacy defined benefit (DB) pension schemes and the associated financial obligations placed on the sponsoring employer. With fewer members in DB schemes, income from contributions is often projected to be insufficient to meet future liabilities. This is worsened by increasing longevity, low interest rates and a move away from equity investments. Large scale derisking of DB pension schemes is inevitable. Globally, the DB pension market is in the very early stages of de-risking. It's been estimated that something of the order of $10 trillion worth of liabilities will be de-risked over the next couple of decades.
We have a suite of de-risking solutions from LGIM's active fixed income, multi-asset and liability driven investment (LDI) strategies up to LGR's longevity insurance and bulk transaction options which we can offer to our clients. To be competitive in this environment you need integrated asset management strength, LDI capability and longevity expertise. You need capital and you need a track record of effective execution. Having these skill sets will continue to set Legal & General apart. This comprehensive product capability is matched by almost 30 years of experience in the bulk sector.
The changes introduced in the March 2014 Budget introduced greater flexibility for individuals in retirement. Customers are demanding simple, tax efficient products that allow them to 'cash-out' their pensions and we have tailored our new products accordingly. For our individual customers we have a series of solutions including: a cash-out retirement plan, a fixed term retirement plan, lifetime annuities and lifetime mortgages together with a targeted website to provide them with the tools and educational material to help them make informed decisions concerning their retirement income needs.
Role and purpose: Our retail business helps customers manage their income in retirement, turning their pension savings into retirement income and helping them use lifetime mortgages to boost their retirement funds with equity from their homes. The corporate business helps defined benefit pension schemes manage their annuity liabilities, through buy-out, buy-in and longevity insurance arrangements.
We're recognised as a leading industry expert in understanding longevity and mortality risks, the understanding of protection, annuity products and services and are committed to continually developing this expertise. We're associated with a number of external longevity science institutions, such as our collaboration with University College London on population ageing, where we sponsor two employees. We also support the Longevity Science Advisory panel, an independent panel of leading authorities who are experts on longevity issues.
Percentage of divisional operating profit: 37% (£639m)
Where we operate: UK, US and Netherlands
MD: Kerrigan Procter
What we manage: We have £43.4bn of annuity assets managed on behalf of over one million customers.
Annuities: Our annuity business has historically been made up of corporate bulk purchase annuities and annuities purchased by individuals once they reached retirement age. The chart shows the percentage of individual versus bulk annuity assets held at the end of 2014.
Premiums arise on the sale of new contracts where the terms of the policy do not anticipate more than one premium being paid over its lifetime, such as in individual and bulk annuity deals.
Annuity Assets for the year ended 31 December 2015
Source: Full Year Results for 2015
Longevity insurance: LGR offers longevity insurance to cover some of the liabilities of a pension scheme whilst making no change to the administration of pensioners' benefits. The chart below shows the progression of our longevity insurance business in terms of gross written premium