The UK Retail Financial Services market:

Capturing the opportunities

Robin Phipps
Group Director (UK Operations)
2 December 2005
1
 Agenda

• Brief overview of Legal & General

• The UK market – changes and opportunities for Legal & General

• Competition and Regulation
• Changing demographics
• Savings and protection shortfalls
• Evolving distribution

• Conclusions

• Questions

2
 Legal & General Group

• Market capitalisation of £7.5bn (€10.9bn)

• 3rd largest life assurer in the UK

• Significant fund management business - £187bn (€273bn) under

management
• Average inflow over £1bn (€1.5bn) per month over last 8 years

• Nearly 90% of Group profits derived from the UK

• Smaller businesses in France, Netherlands, Germany and the USA

3
 Legal & General UK business

• UK individual business market share over 11%

• market share doubled since 2000
Annuities Protection
• Broad range of products for Individual 13% 19%
and Corporate markets

• Strong partnerships with Banks and

Building Societies

• Leading Direct provider

Collective Pensions
• Well-recognised brand – favourable Funds 28% 22%
view from financial journalists Investment
Bonds 18%

4
 UK Life & Pensions market

Competitive picture
• Scope for further concentration
• Top 5 Life & Pensions providers have 48% of new business (2000: 37%)
• Real scale advantages from brand/technology costs and underwriting
information

Regulation
• Complex and costly system of sales regulation
• but system now largely stable and implemented by market
• complexity favours large providers
• Government looking to reduce burden of regulation for compliant firms

5
 The UK: Changing demographics

Number of people aged 65 and over

• Not a time bomb but an iceberg,
moving slowly towards us
millions
20 • State provision increasingly stretched
• Basic State Pension well below EU
15 average
• Employers moving away from defined
10 benefit pensions

5
• Boundaries between public and
private healthcare provision are
blurring
0
• Increasing inheritance to help fund the
cost of ageing and healthcare
60
70
80
90
00
10
20
30
40
50
19
19
19
19
20
20
20
20
20
20

6
 The UK: Savings & Protection
opportunities
• Retirement savings shortfall £27bn+ (Mercer Oliver Wyman 2001)
• Pensions Commission recommendations for Government policy
• Increase in retirement age
• Changes to state pension
• Increased pension saving
• Pensions tax changes 2006:
• transfers • higher tax relief limit
• SIPPs • income drawdown

• Protection shortfall “conservatively” estimated as £2,000bn cover

(Swiss Re 2002)
• current ABI new protection business £1.4bn pa APE could double
• tax-efficient term assurance using pensions tax relief
• expertise of leading providers has created significant entry barriers

7
 The UK: Distribution changes
Depolarisation
• 1988 – 2005: all investment advisers “polarised” as either:
• Independent Financial Advisers (IFAs): choose most suitable product from
whole market, or
• Tied Agents, selling products from a single provider

• From June 2005: Complete flexibility of status

• Market expectation:
• many IFAs would “multi-tie” to 4/5 providers
• a race to secure distribution
• But in practice:
• limited impact
• probably less than 10% of total market to multi-tie

…and a new route to investor choice is emerging

8
 The UK: Distribution changes
The rise of the Fund Platform
Adviser Customer • Single technology platform
offering wide range of funds
from different managers
Fund Platform • Has transformed markets in
USA and Australia
• Customer benefits
• wide choice of investment funds
ISA Pension Bond • range of product wrappers

Product wrapper providers • Adviser benefits

• facilitates ongoing advice
• reduces back office cost

A B C D etc • Advisers want single platform

• effective tie to one platform
Fund managers
9
 The UK: Distribution changes
Channel prospects
IFAs
• Still the predominant distribution channel, but some significant issues:
• overhang of industry compensation costs
• ageing adviser population
• need to show added value to clients from ongoing investment advice
• Recovery in income from individual pensions
• Limited impact from shift to multi-ties

Banks and Building Societies

• Market penetration significantly below some EU markets
• Huge gap in bancassurance results between banks
• reflects level of commitment and quality of execution
• levelling up to best practice could expand total market by 20%+

10
 Legal & General: capturing the
opportunities
Legal & General
A strong, flexible distribution network:
Tied
Agents IFAs (56%) • Stable and growing flow of business from
& Direct strong Bank/ Building Society partnerships
(11%)
• Major synergies with strong mortgage
Banks/BS intermediary business
(33%)
• Stability gives base for increasing presence in
IFA market
Market
• Leveraging capabilities across distribution
channels
Tied IFAs (60%) • Specialised Corporate Business units
Agents
& Direct
(16%) Banks/
• Strategic stake in Cofunds technology platform
BS
(24%)

11
 Conclusions

• Substantial opportunities in a more orderly UK market

• Regulatory stability + need for increased personal savings
• Multi-tie impact likely to be limited – fund platform developments
more significant
• Banks/BS to increase market share – Legal & General well
positioned to capitalise
• A well-recognised customer brand
• Broad product spread, good quality of service + multi-channel
access vital to success

Legal & General is well equipped to turn

change in the UK market into opportunity
12