Independent Governance Committee Annual Report

For the year ending 5 April 2018

Independent Governance Committee Annual Report

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Independent Governance Committee Annual Report Independent Governance Committee Annual Report

We will carry out, from time to time, member surveys to gain your view on whether you believe that you are receiving a value for money service. We also carryout meetings with employers and hold an Annual Member Forum

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Contents

3 Chairman's report

8 Introduction to this report

9 Criteria

10 Criteria 1 - Price (costs and charges)

11 Criteria 2 - Default investment strategies

13 Criteria 3 - Returns on your investment

14 Criteria 4 - Flexibility

14 Criteria 5 - Administration

15 Criteria 6 - Communication

17 Criteria 7 - Feedback

17 Focus on - Transaction costs

19 Focus on - Stewardship

20 Focus on - Feedback

22 Overall assessment of value for money

23 Appendix 1 - IGC Members

26 Appendix 2 - Dean Wetton Advisory

Chairman’s report

This is the third annual report of the Independent Governance Committee (IGC) and my first report as Chairman. I am delighted to be able to tell you about the main issues on which we have focused over the last 12 months, the areas in which we have made progress and those where we will continue to expect improvement in the future.

Value for money

Acting on behalf of scheme members, our mission is to scrutinise the value for money offered by Legal & General’s contract-based Workplace pension schemes. It is our duty to raise any concerns we have with Legal & General and, if necessary, to escalate those concerns to the Financial Conduct Authority (FCA).

The IGC assesses value for money across the following areas:

The IGC has concluded that the Workplace pension schemes offered by Legal & General do offer good value for money for the majority of members and at least fair value for nearly all. Where we have identified issues for a relatively small number of members we are actively working with Legal & General to ensure improvement. The basis for this judgement is set out in the ‘value for money’ section of this report.

As the IGCs have now been in existence for nearly three years, we intend to review our framework for assessing value for money this year. We want to check that it is still relevant and examine whether it can be improved. We will use the experience we have gained and the benefit of exchanging ideas with other IGCs.

Value for money

Members should be able to access their pension savings however they wish

Flexibility

Administration

This will test the level and quality of customer service that you receive and the speed and accuracy of financial transactions

Returns on your investment

How your investment performs

Communications

These should be clear and available in a variety of ways

Price

This covers any costs that relate to your pension arrangement

Default investment strategies

Default funds are the fund(s) that your pension pot is invested in unless you choose to do something different

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Our relationship with Legal & General

In the year since I joined the IGC, I have been impressed by the consistent attitude and enthusiasm of the people within every department which we deal with throughout the Legal & General Group. There is a clear understanding that what they do is important for scheme members and a desire to improve wherever possible.

That is the basis for a good working relationship. But this does not mean that everything is perfect. Legal & General has some older systems, which can pose a challenge for a large institution with millions of customers. This statement sets out the key areas where the IGC has identified issues, the progress that has been made and what remains to be done to resolve them.

Our people

The IGC has seen two new members join the committee this year.

I joined as Chairman at the beginning of the reporting period and I would particularly like to thank Steve Carrodus for acting as interim Chairman and for overseeing the publication of last year’s report.

Daniel Godfrey joined us in September. As a former Chief Executive of the Investment Association and consultant to the FCA, he brings a great deal of experience of governance and regulation. In the past, he has been actively engaged in efforts to improve transparency and cost disclosure in investment management and his communications experience will also be of tremendous value.

Richard Atkins, the IGC’s Pension Scheme Manager, left us before Christmas. Richard did a wonderful job for the IGC and we wish him the very best for the future.

I am delighted to welcome Sharon Bellingham as our new Pension Scheme Manager. Sharon joined us in February from the pensions consulting firm, Hymans Robertson, where she was a Senior Consultant. She has a wealth of experience in defined contribution pensions and we are very much looking forward to working with her.

I would also like to thank Nicola Lonergan and Thelma Keating, who have stepped in to help us in the interim between Richard’s leaving and Sharon’s joining. Their assistance and hard work has been very much appreciated.

Finally, I would like to thank Andrew Fairhurst and Leanne Cornish of Legal & General Group Secretarial for their assistance in bringing me up to speed when I joined and for their work in the administration of IGC meetings.

High focus initiatives

This year, key areas of focus have included:

Our work and the results achieved in these areas are discussed later in this statement.

Review of default funds

We have been looking at whether funds are still fit for purpose following the introduction of pension freedoms. In the past, almost all scheme members would have used their pension pots to take some tax-free cash and to buy a guaranteed income (an annuity) with the balance. Pension freedoms allow scheme members to take and/or use their pots however they wish and this means that significant evolution of default funds is needed to adapt to very different requirements.

Transaction costs

The road towards greater cost transparency has been long and complicated. Transaction costs fall on scheme members and are incurred when investment managers buy and sell investments in your funds. We have been following the various regulatory and industry initiatives dealing with the disclosure of transaction costs. Our aim is to ensure scheme members are provided with full disclosure in a format that can be understood and we are able to challenge these costs where needed.

Member communications and engagement

The IGC wants to improve its understanding of the views of scheme members and employers. We also want to increase awareness and understanding of the IGC and our role in protecting your interests.

Benchmarking

We have been considering how IGCs can work together to create benchmarks so that individual providers can be rated for excellence against the components of ‘value for money’.

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Sale of Mature Savings

Throughout this document you will see reference to Mature Savings and Workplace; this is because two different Legal & General business units oversee different products for scheme members. Although from a member perspective their relationship is with Legal & General it is important to acknowledge where there may be a difference in experience as a result. We especially wanted to bring this out clearly in this year’s report because of the announcement of the sale of the Mature Savings business.

In December 2017, Legal & General announced the sale of its Mature Savings business to ReAssure, a division of Swiss Re. The sale includes the accounts of all legacy Workplace members, GPP 2000 scheme members and some former members of Stakeholder schemes who are included in the scope of this IGC.

The transfer of the business is expected to complete by mid-2019 at which time member oversight will transfer to ReAssure’s IGC who will continue to independently represent their interests. Although the conclusion is still a little way off, both ReAssure and Legal & General have stated their commitment to achieving a smooth and effective transition. The IGC is committed to ensuring that the interests of members whose pension arrangements are being transferred remain fully protected by the IGC until the final day that they remain under our remit.

The year ahead

Over the coming year, the IGC intends to focus on:

• Default funds

Default funds will be a continuing focus for the IGC in the coming year. We will be looking in particular at bespoke default funds created by employers and their advisers to ensure that they have appropriate governance, remain fit for purpose and represent value for money. We will also be considering what action we can take to help protect scheme members’ interests if necessary. We will also look at default funds for scheme members who want to remain invested through retirement to ensure that they have appropriate options consistent with the requirements of pension freedoms.

• Transaction cost disclosure

This is a very complex and technical area which is still evolving. The IGC will need to stay on top of developments to ensure that we provide the best possible information to scheme members.

• Financial planning tools

Our conversations with scheme members and employers indicate that members are interested in seeing a consolidated view of all their investments when they access their Legal & General pension scheme online. This would enable them to make best use of new financial planning tools and so help them make more informed decisions about their future.

• Charging issues

A number of issues have been identified that could have resulted in a number of scheme members being in funds that carry high charges or having charges incorrectly applied. On an individual level, we do not believe that the amounts involved are significant. However, the process for rectification and remediation has extended longer than we would have liked and these are still ‘open’ issues. The IGC will be keeping a very close eye on progress to ensure that there are appropriate and timely resolutions.

• Mature Savings

We will continue to protect the interests of scheme members that are within our scope, within the Mature Savings area that has been sold to ReAssure. We intend to identify and deal with any potential issues right up to the moment that we expect to hand over to ReAssure’s IGC in mid-2019 and we will work with them to ensure that this goes well.

• Engagement, feedback and benchmarking

Over the coming year, we intend to enhance our approach to ensure that we hear the views of scheme members and employers, raise awareness of the IGC and our work and gain better understanding of the market position of the Legal & General schemes by working with other IGCs.

• Investment performance

We intend to increase our focus on investment performance and how the main funds offered to members are performing against their objectives.

• Stewardship

We intend to ensure that members are more aware of the options available to them to invest in ways that focus on sustainability and responsibility issues. We believe that members are likely to become more concerned about the impact that their investments may have on the world that they are going to retire in.

We will continue to publish regular updates on our website at landg.com/igc

Dermot Courtier

Chairman

April 2018

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The purpose of the Annual Report

IGC reports can be difficult to prepare because they serve a number of audiences. Our most important audience is the members of the pension schemes that we cover – we exist to promote and to protect members’ interests. Our report will also be of interest to employers and the wider pensions market of advisers and consultants. Finally, the requirement for some pension schemes to have IGCs was established by the Financial Conduct Authority (FCA) and so this statement is also written to show how the IGC is meeting their objectives.

We know that financial products and jargon can be confusing and difficult to understand. We have deliberately kept it to a minimum wherever possible to ensure that this report provides scheme members with what they need to know.

A word on the default strategy and its role in our value for money judgements

The current default strategy is to invest in the Multi-Asset Fund. Since the introduction of pension freedoms Legal & General no longer applies automatic de-risking (gradual switching out of more volatile types of investment, like shares in companies) in the decade before retirement. This is because far fewer members are likely to use their pension pot on a single day to buy an annuity (which typically pays a guaranteed income for life). This makes de-risking less attractive and the IGC agrees that the Multi-Asset Fund without de-risking is the most appropriate default strategy.

The Multi-Asset Fund is the preferred default for the majority of clients. However, larger employers often select a non-standard default strategy based on analysis of the membership profile by an independent adviser. The IGC is encouraging Legal & General and employers to review their default strategies to ensure that they remain appropriate to the membership and aligned with the flexibility of how members can withdraw their pension.

The IGC is comfortable with Legal & General’s default strategy but accept that more work needs to be done for employers in non-standard defaults that may not have been reviewed, and members invested in the Legal & General legacy defaults.

Value for money

We monitor value for money against seven criteria and this year we have introduced a value for money scoring framework to enable us to track progress year on year.

Each of the key value criteria has been rated. The scale on each dial ranges from – 3 to +3. The methodology is not scientific. These scores are not intended to be precisely calibrated measures of value or performance, but should provide a ‘snapshot’ so that scheme members can see how each area has performed in this period based on the IGC’s overall assessment and analysis. The scores are designed to indicate a range with 'completely unacceptable' (which we would be very disappointed to ever get close to awarding) at one end and 'perfect' (which we would be unlikely ever to award on the basis that there is always room for improvement) at the other. This range is indicated on the dial as red, amber and green.

The thinking behind each score is shown in the relevant section of this report. We will review this methodology as part of the IGC valuation later this year.

Introduction to this report Criteria

1. Price (costs and charges)

This will cover any costs that relate to your pension plan.

2. Default investment strategies

Default funds are the fund in which your pension contributions are invested if you do not make a specific investment choice.

3. Returns on your investment

How your investments perform.

4. Flexibility

You should be able to access your pension savings in any way the regulations allow (subject to pot size).

5. Administration

This will test the level of customer service that you receive and the speed and accuracy of financial transactions.

6. Communications

These should be clear and available in a variety of ways.

7. Feedback

How we gain and act on your views on whether you believe that you are receiving a value for money service.

-3 +3

-2 +2-1 +1

0+1.5

-3 +3

-2 +2-1 +1

0+1.5

-3 +3

-2 +2-1 +1

0+1.5

-3 +3

-2 +2-1 +1

0+2.0

-3 +3

-2 +2-1 +1

0+1.5

-3 +3

-2 +2-1 +1

0+1.5

-3 +3

-2 +2-1 +1

0+0.5

Value for money score summary

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WorkSave

Legal & General’s charges, excluding transaction costs, for scheme members in new Workplace pension schemes (which invest in Legal & General’s standard default Multi-Asset Fund) are capped at 0.5% per annum. This is the equivalent of a 50 pence charge for every £100 invested. The IGC recognises that this pledge is unique for contract based schemes and considers that this represents good value for money in the marketplace.

In the 2017 report, we disclosed transaction costs for the default funds. This report contains greater detail of transaction costs than before and there will be further monitoring by the IGC on this subject throughout the year ahead.

With Profits value for money assessment

The With Profits management team updated the IGC at numerous meetings during 2017. Based on this, and the information that the IGC has reviewed, we believe that the With Profits fund continues to offer members reasonable value for money.

Charges on legacy schemes administered by Mature Savings

Following action taken by Mature Savings in 2016, all active and former members of Mature Savings pension schemes have enjoyed the benefit of a charge cap during 2017. This cap ensures that when members take their pension pot in the future, the value of that pot will be at least as much as the amount they would have received had they transferred into a Stakeholder pension product with a maximum charge of 1% a year.

In addition, a 1% cap on exit charges, from age 55 was implemented on 31 March 2017 across all of Legal & General’s pensions business and was simultaneously extended to cover ill-health retirements before age 55. Furthermore, all exit charges were removed on serious ill-health retirements.

It is worth noting that these additional exit charges were only present where the underlying charging structure included initial units. During 2017, Legal & General reconsidered these charges and the IGC requested that such exit charges be abolished. However, following input from the With Profits Committee regarding wider fairness issues, a resolution has not yet been agreed with Legal & General. The IGC does not consider the matter to be closed and will be pressing for a fair outcome for the scheme members concerned in 2018.

Charges on legacy schemes administered by Workplace DC Pensions

In last year’s report, we advised you that Legal & General’s Workplace business had committed to completing the work of reducing charges for members by the end of March 2017, with amendments backdated to 30 September 2016. This was in line with our original plan. We are pleased to report that this work was completed on schedule and a further 2,710 members are now benefitting from charges that are less than 1% a year.

Legal & General had also agreed to contact those members who had self-selected investment funds with high charges and draw their attention to the opportunity to choose an alternative, cheaper investment option if they felt it would be suitable for them. This exercise was completed in early 2017 and resulted in a number of members proactively reviewing their investment choice and moving into alternative funds.

Legal & General has since agreed to go further. Where there is no evidence of members responding to the initial communication, it will write to them one more time. Subsequently, in the absence of any response, Legal & General will automatically switch members into the current default investment option for the scheme that they are in. This will ensure that those members pay lower charges. There are approximately 40 members in this situation and Legal & General has confirmed that this exercise will be completed by 31 March 2018.

Drawdown charges

Under pension freedoms, members have the option to access their retirement savings by drawing a flexible income. This is often referred to as drawdown.

The IGC has reviewed drawdown charges across both Mature Savings and Workplace DC Pensions propositions. It has not been possible to obtain comparative drawdown charges from other providers because of the employer specific nature of these products. Consequently, the IGC decided to use drawdown charges on retail investments as a comparator. On this basis, the IGC has concluded that Legal & General’s Workplace propositions do offer fair value for money.

It is reassuring to see that Legal & General assesses all charges on an ongoing basis for competitiveness through product risk reviews. This includes feedback received during competitive bidding exercises (where an employer is sourcing the most suitable pension provider for their staff), and feedback directly received from employee benefit consultants and scheme advisers. Information and research shared by The Pensions Regulator, DWP, FCA and other independent bodies is also considered.

How this feeds into our price score

The IGC believe that members who are invested in the default Multi-Asset Fund are receiving good value for money, which would rate a score of +2.0. However, we have reduced the overall score to a reasonable value for money score of +1.5 to reflect the fact that a number of members are still exposed to higher costs than we would like, or face exit penalties. We would hope to be able to increase the overall rating to good next year.

Criteria 2 - Default investment strategiesThroughout 2017, Legal & General has made regular reports to the IGC on the progress of the default strategy projects that fall under our remit.

Legal & General product default investment fund

A member’s pension will either have a standard or bespoke default strategy where contributions will be invested unless they specifically choose an alternative fund.

Legal & General has a roadmap of activity addressing standard default strategies. Since April 2013, the default investment option for new joiners of existing Workplace pension schemes (where employers have not requested an alternative, bespoke default strategy) has been the Multi-Asset Fund. Legal & General is now reviewing members who joined before April 2013 and who have a different default investment option with a view to switching them automatically into the Multi-Asset Fund. To make this happen Legal & General applies the deemed consent principle to the switch and, working closely with the FCA, has changed the terms and conditions of the WorkSave Pension Plan accordingly.

The IGC believe that this is in the interests of members and so we have supported this change to the terms and conditions.

Legal & General is also supporting employers who are already switching from the Multi-Asset Fund with a 10-year de-risking period ahead of normal retirement age into the Multi-Asset Fund without a de-risking pathway. De-risking is a process whereby a member’s pot and contributions are gradually moved away from more volatile assets like equities in the years approaching retirement to reduce the risk of a sudden drop in markets. Following the introduction of pension freedoms it is less obvious that the de-risking approach, targeting annuity purchase, remains appropriate; this is borne out by member behaviour to date with many fewer now choosing the option of purchasing an annuity.

Legal & General is currently reviewing the legalities of allowing switches without member consent on the GPP 2000 and Stakeholder products. The final plans have been impacted by the sale of the Mature Savings business to ReAssure and we wait to hear in the first half of 2018 how this will impact implementation. This is a significant programme that needs to take into account the best interests of members. The IGC will keep it under close review.

Criteria 1 - Price (costs and charges)

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Bespoke default options

In 2016, the IGC commissioned an investigation into the governance arrangements of active auto enrolment schemes which offered bespoke default investment options. These defaults have usually been designed by investment advisers and are different from the current Legal & General default investment option for the product.

Even though these bespoke default options have been created by employers and their advisers, Legal & General and the IGC still have a responsibility to ensure that they remain fit for purpose and to take action if we have concerns.

In late 2016, 237 employers were mailed a governance questionnaire and in early 2017 this was followed up with a reminder. The results indicated that, while some schemes regularly consult an investment adviser, others do not. Many of these schemes have been in place for several years, during which time auto enrolment may have changed the employer’s scheme membership profile. Furthermore, the advent of pension freedoms has certainly changed the retirement options available to members. Both of these events could have caused the employer to review, with their investment adviser, the bespoke default they have in place, and in many cases to amend it. Initiatives such as the Department of Work & Pensions (DWP) guidelines on auto enrolment defaults, and the Investment Association’s information for employers on scheme defaults, have for some time underlined the importance of good governance for pension scheme defaults.

Legal & General, in conjunction with its external investment adviser, has developed a method of reviewing the appropriateness of default investment strategies, taking into account the risk and return characteristics of the strategies. Based upon this methodology, the defaults for schemes where there were concerns with their governance arrangements were examined for investment appropriateness.

The combined results were used to reach a view on whether any further action is required. High level action plans have been drawn up, ranging from noting the governance is working well, engaging

in face to face or telephone conversations with the employers on default governance, through to considering a forced change to the scheme’s default for new joiners. Detailed plans will be prepared and will start to be implemented in early 2018. Although some initiatives will complete in 2018, this will be an on-going project requiring employer and member engagement. The IGC will continue to monitor this programme.

Bespoke default strategies for new schemes

These exercises have prompted Legal & General to review the governance arrangements for employer commissioned bespoke default arrangements. A new governance framework has been put in place that requires an employer to make a written commitment to the on-going monitoring of the default strategy, including an advised review of the appropriateness of the strategy every three years. The IGC welcomes this and will continue to monitor this programme over time.

Bulk switch without member consent

In 2017 a number of schemes, having taken independent advice, decided to change their default strategies to accommodate changes in legislation and investment thinking. The IGC has supported Legal & General’s project that enabled these and future bulk switches to take place without member consent on condition that a member opt-out facility was provided. Through regular engagement with the FCA, the launch of a new policy and creation of a new, focused operational team, Legal & General was able to adopt an approach that has now positively impacted over 115,000 members with many more in the pipeline.

How this feeds into our default investment strategies score

The IGC believes that the Multi-Asset Fund without de-risking as the primary default strategy is good and deserves a +2.0 score. However, as some members are still in older Legal & General default funds or non-standard strategies yet to be modernised, the IGC has given a rating of +1.5.

Investment governance

Legal & General monitors all funds across all products under the IGC’s remit, including the default investment option, on a quarterly basis. This review includes an independent analysis of performance against benchmarks and compares risk expectations with actual experience. This review feeds into a watch list under a buy/sell/ hold rating system that prompts action where needed. An internal committee, reporting to the Legal & General Assurance Society board monitors the results against a number of principles.

All internal funds are subject to Legal & General’s product process that reviews the appropriateness of funds from a customer, commercial, operational and performance perspective and all external funds are subject to due diligence and oversight.

The IGC is satisfied that Legal & General takes a proactive oversight of the range of funds available, communicating with members and closing/replacing funds where appropriate.

Review of investment funds

Below and appended is a note from Independent Advisers, Dean Wetton Advisory (DWA) on the Multi-Asset Fund default strategy:

"Compared to other funds in the ABI Mixed 40%–85% equity benchmark sector, the fund has seen yearly returns of 9.2% as against the benchmark return of 8.9% over the last 5 years. In 2017, the fund achieved a return of 9.7% compared to the benchmark’s return of 9.6%.

The investment manager changes the investment strategy over time to reflect market conditions. DWA believe that the fund is appropriately positioned to achieve its objectives going forwards.

In summary, DWA believe the Multi-Asset Fund is appropriate for members. The performance of the fund has been good and it dovetails well with the supporting lifestyle strategies that can be self-selected."

Below you can find information about the performance of Legal & General’s default funds:

The fund performance provided is:

• After all fund charges and transaction costs have been taken, but doesn't include any other product charges.

• Inclusive of all income generated by the investments remain within the fund.

How this feeds into our return on investment score

We have rated investment performance as +2.0. This is based on the performance of the Multi-Asset Fund, and through the information provided to the IGC on the extensive monitoring report that Legal & General governs across the entire fund range.

L&G Cash 3 ABI UK - Deposit & Treasury-Pen 0.26% -0.19% 1.07% -0.38% 2.06% -0.53%

L&G Multi-Asset (PMC) 3

ABI UK - Mixed Investment 40%-85%

Shares-Pen9.70% 9.6% 32.71% 27.2% 55.41% 53.25%

Over 15 Year Gilts Idx (PMC) 3

FTSE A UK Gilts > 15 Years 2.55% 3.32% 22.90% 22.53% 44.49% 45.39%

L&G Fixed Interest Fund ABI UK - UK Gilt-Pen 1.86% 1.26% 12.94% 10.71% 23.23% 18.75%

L&G UK Equity Index Fund FTSE All Share 13.49% 13.10% 32.26% 33.34% 61.19% 62.98%

1 year performance

3 year performance

5 year performance

FundBenchmark/

sectorFund

Benchmark/ sector

FundBenchmark/

sector

Criteria 3 - Returns on your investment

FundBenchmark/ ABI sector

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The subject of pension freedoms is outside of the IGC’s scope but we consider it to be a key indicator in delivering value for money. We want members to be able to access their pension savings in any way allowed by the regulations. Little has changed on the subject of flexibility throughout 2017; members do have flexibility of choice, although we believe the experience of how member choice is implemented could be improved. Legal & General makes flexible drawdown, where members can access their pot as cash whenever they want it, available to all members. Legal & General offers a well-structured and appropriate default option. The IGC believes this default has been designed with the best interests of members in mind.

How this feeds into our flexibility score

The IGC is pleased to see that members have the ability to choose how they access their pension. The only reason we have scored flexibility as +1.5 rather than +2.0 is because it is thought that improvements could be made to the drawdown proposition to enhance member experience. For example, members being able to control and make changes to income online. The IGC is also pleased to hear that Legal & General has some plans in this area for development in the near future.

Criteria 5 - Administration During the year, a major relocation of administration from Kingswood to Cardiff took place. This led to some temporary falls in service standards. These have now returned to normal and recruitment, particularly at senior management level is now complete.

The quality and timeliness of service that members and their employers receive is a key part of the value for money assessment. We review the speed and quality of Legal & General’s response to member requests, the quality of Legal & General’s servicing and members’ views on the service received.

The IGC reviews updates on service performance at every meeting and the IGC’s Pensions Manager receives monthly information covering service performance, volumes, trend analysis and commentary against each process within the IGC’s remit. We publish service performance statistics on our website on a six-monthly basis.

The IGC was made aware of some service issues in relation to the settlement of death benefits early in 2017. We were provided with a commitment from Legal & General’s senior management that they would be improving the position urgently. We are pleased to report that the service position improved significantly during the second part of the year.

In 2017 the IGC visited Legal & General’s Workplace division in Cardiff. The time was spent listening to member calls and reviewing presentations and updates from the senior leadership team. The contact centre employees professionalism, enthusiasm and focus on providing good customer service was evident during the visit.

Legal & General has provided the IGC with the assurance that all transactions are processed in accordance with the terms of the contract and backdated if necessary to reflect the request or receipt date. This ensures no member is disadvantaged because of any delay.

The IGC was provided with the findings of audits conducted by Legal & General’s Group Internal Audit function in areas related to the IGC’s oversight. The IGC has recently been made aware of an internal audit report relating to claims and transfers out in the Workplace business and has received assurances from senior management that all resulting actions have been agreed and are being completed on schedule.

In our last report, we noted that Legal & General had implemented a project to remove a number of funds from the investment platform. This affected approximately 6,500 members from a customer base of 2.6 million. Our last report stated that the funds were closed and switching took place in October 2016, with members receiving communication throughout the process.

It has since come to light that for approximately 2,100 of these members, either the planned switches did not complete as intended, or the communications were not of the required standard.

A plan was created and put in place to rectify these errors. For members this includes the correction of errors, production of communications, and the calculation and reimbursement of any difference in value.

To date, all scheme members who were affected by the errors have been contacted and the detailed work to complete the switches is underway. All activity, including reimbursement of any losses sustained, is expected to be completed in the first half of 2018. We will keep this under review.

How this feeds into our administration score

The IGC is pleased that some of the issues of greatest concern were improved over the course of 2017 and we believe that we will see further improvements over the course of 2018. We hope that this will enable us to move from an ‘OK’ rating of +0.5 to a score that indicates ‘good’.

Criteria 6 - Communication Legal & General made a significant investment in communication in 2017 both in terms of people and development.

A new Head of DC Client Communications was recruited to lead the communications team and a new Head of Financial Wellbeing was recruited to focus on a more holistic service offering.

A four-stage member journey was launched and rolled out across the communications suite. This new journey focuses on what Legal & General refers to as the ‘life stage’ of a member in their retirement savings challenge and reduces the prominence of product or technical content. Instead focusing on supporting the member in reaching their retirement goals. It is now easier to engage with members and much easier for members to navigate and find the support or information they need. The approach is being used both online and offline thus giving members a consistent experience however they wish to access information.

The IGC has seen employers playing a greater role in developing, piloting and testing member communications in 2017. The DC Communications Working Group and DC User Group have been directly consulted during the development of new concepts and material. Prime examples of this are the new pension benefit statement and maturity pack, both of which were launched recently following direct feedback and input from these groups.

In 2018, Legal & General intends to use digital channels and online survey tools to give members greater input in the development of communications. This is just one of the ideas outlined in a new research and insights strategy being introduced.

Criteria 4 - Flexibility

First step On your way Getting there

Arriving

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Finally the member can click through to a form and increase their contributions

As part of the digital customer programme proposition further investment will be made to Manage Your Account (MYA), the core online service and member engagement tool. Investment to significantly enhance the user experience through design, tools and functions began in 2017 and will continue throughout 2018/19. The aim is to ensure these improvements are made available to members whenever it’s convenient for them.

A key theme for 2018 alongside digital innovation is financial wellbeing. The IGC recognises retirement savings are just one part of a member’s financial concerns. Accordingly, we are keen to see further development in a new wellbeing proposition that takes into account a members’ full financial picture, rather than solely the pension investments they have with Legal & General. It is being designed to support members in every area of their financial needs and objectives.

How this feeds into our communications score

The IGC believes that the current level and quality of communications described above merits a score of +1.5. However, we are excited by Legal & General’s plans for 2018 and if our expectations are met, we would expect to be giving a higher score in our next report.

Criteria 7 - Feedback

The IGC is keen to receive feedback and to exchange views with all stakeholders. In 2017, this included the Annual Member Forum, member research, meetings with senior Legal & General employees, site visits to administration and call centres, conversations with employers and attendance at DC User Group and DC Communications Working Group meetings.

A focus on feedback and how this feeds into our feedback score is included later in this report.

Focus on - Transaction costsThe IGC wants full transparency of costs and charges to be provided to members. It is clear from direct feedback received by the IGC, through the Annual Member Forum, that many members are not

fully aware of the costs that impact their pension plans. Last year, we described at a high level the annual management charge and fund management charges that are applicable to members’ plans in addition to transaction costs of default funds. This year’s report focuses on transaction costs of all investment funds available to members.

The Financial Conduct Authority (FCA) has now made a rule that asset managers will be required to disclose administration and transaction costs to IGCs from 3 January 2018. This requirement will improve our ability to assess value for members.

Transaction costs explained

Transaction costs are important because they are costs that affect the value of your investments. In the past, it has been very difficult or impossible for investors and advisers to get a good sense of how high or low these costs have been. This is now changing. Transaction costs are incurred when a portfolio of assets is purchased to create a fund and then also in the course of the day-to-day management of these assets as they are sold and new assets are bought to achieve the fund’s objectives. Costs are incurred as a result of buying, selling, lending or borrowing investments held by a fund.

Transaction costs can be separated into two categories:

1. Explicit costs

These are costs that are directly charged to or paid by the fund and may include taxes and levies (such as stamp duty), broker commissions (fees charged by a broker to buy and sell investments on behalf of the fund) and costs of borrowing or lending securities.

In an everyday example, such as house buying and selling, members may be familiar with stamp duty, Land Registry fee, solicitors’ fees, valuation fees, estate agents’ fees and so on.

These costs are billed and paid in cash and so can be accounted for precisely. They are known as ‘explicit’ costs.

£7,970£9,720

Potential income

Income now

+£7,970

a year£50,000

Tax free cash

£23,81029/01/2018

Click here

6% 12% 18%=+

Extra

Member opens video and is greeted with a personalised message

They are then shown the current value of their pension pot

…and the result of continuing to save at this rate

they are then encouraged to increase their contributions

The video then covers pension freedoms at retirement

…with an example of what their pot could look like in the future in today's prices

Visual for illustrative purposes only.

a month£100

The IGC is pleased to see Legal & General delivering a digital first proposition and demonstrating a commitment to deliver a greater proportion of communications electronically using new channels, such as video, to facilitate member engagement. In 2017, Legal & General launched a personalised video benefit statement that has proven very effective in increasing member engagement with their pension savings. This has been evidenced by high click through rates and active decisions to increase contributions. The 2018 video strategy will see Legal & General continue to develop video content that supports members at key decision making points.

Personalised video benefit statement demonstrating the impact of increasing contributions. An example of the video can be found here.

Hi thereSophie

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2. Implicit costs

Implicit costs are not costs that are invoiced and settled for cash like explicit costs. They cannot be calculated precisely.

A real-world example with which many members will be familiar would be buying and selling foreign currency. You may pay a commission (an explicit cost) but there is likely also to be a gap between the price at which the dealer buys the currency and the price at which they sell it. If you bought a foreign currency from a dealer and sold it back to them immediately, you would make a loss. This gap is known as 'spread’ and is an implicit transaction cost.

The size of the spread relates to factors such as the liquidity of assets being traded. Liquidity refers to how easy it is to buy and sell an asset – cash is completely liquid, gold is pretty liquid, property is relatively illiquid. In the currency example, the spread between the buying price and the selling price is likely to be wider for Liberian dollars (relatively illiquid) than US dollars (highly liquid).

Another factor is size of the transaction and market conditions at the time of the trade. In the currency example, if you want to buy US100 dollars, you will probably get the price you see on the screen or the blackboard outside the shop. If you want to buy US100 million dollars, your order is likely to affect immediate supply and demand in the whole market and push the price up. This is known as ‘market impact’ and is another implicit transaction cost.

There is no standard way of calculating implicit costs. The FCA has recommended a method called ‘slippage’. This method defines implicit costs as the difference between the actual price paid (‘execution price’) and the quoted ‘mid-market price’ at the time the order was placed (‘arrival price’). This method, although reasonable if observed over a long period of time, can result in a volatile measure from one year to another. It can even result in a profit, known as ‘negative costs’. This can happen, for example when buying an asset, if the actual price paid ended up being lower than the mid-market price at the time of placing the because something happened in the market that pushed the price of the asset down - such as some bad news or a big sell order by someone else.

To further the understanding of transaction costs, attached to this report, you can find an example reiterating the above explanation for a hypothetical transaction. The figures used are not representative of a real transaction; they have been intentionally magnified to simplify understanding of the subject.

Regulatory requirements for the reporting on transaction costs

IGCs are required to report on transaction costs at least annually and to assess the extent to which these costs represent good value for money.

As noted above, the FCA has indicated its preferred methodology for the calculation of transaction costs. All providers will have to follow this methodology for all transactions incurred in 2018 and onwards. For 2017, however, other sound methodologies will be acceptable.

Transaction costs for 2017

Legal & General has provided us with a report of transaction costs for 2017 for their own funds and details are linked from this report. We expect disclosure later in 2018 for funds managed by external asset managers as Legal & General had not received this information in time for our report.

The report is based on the template developed by the Investment Association in conjunction with the Local Government Pension Scheme and has applied the FCA recommended ‘slippage’ methodology to calculate implicit costs. However, Legal & General has not been able to source, in time for this report, reliable mid-market prices at the time the orders were placed to use as ‘arrival prices’. Instead, it has used the previous day’s market closing prices for this purpose. The IGC believes this to be a reasonable and unbiased alternative.

Legal & General is awaiting further guidance from the Institutional Disclosure Working Group (IDWG) which has been commissioned by the FCA to standardise the disclosure requirement for the industry. This is expected later this year.

As this is the first time that Legal & General, and indeed the industry, has provided a relatively comprehensive disclosure of transaction costs, the IGC will analyse these costs, challenge where necessary, and assess value for money for members.

Transaction costs for 2017 – The default fund

It is pleasing to see that the transaction costs associated with the buying and selling of assets within the default fund, the Multi-Asset Fund, have not been a drag on its performance. In fact, based on the FCA methodology, the Fund has marginally profited from the transaction costs of these activities as indicated by the ‘negative’ total transaction costs of -0.01%; implicit costs of -0.02% plus explicit costs of 0.01%.

As noted above, the implicit costs measure calculated using the slippage methodology is volatile and, therefore, of little significance in the short-term. Consequently, until the IGC sees evidence of the sustainability of the ‘negative’ implicit costs, we are minded to focus on the explicit costs of 0.01% during the year. The IGC regards these direct costs, which are equivalent to 1p for every £100 of members’ assets, exceptionally low and very good value for money.

Transaction costs for 2018

Legal & General has committed to providing quarterly transaction costs information for all internal and external funds, based on the slippage methodology and using ‘arrival time’ as defined by the FCA, from the second half of 2018. The IGC will review and, if necessary, challenge the information provided as part of its value for money assessment process.

You can find the transaction costs and the performance of all Legal & General’s internal funds together with the associated costs here.

Third party managers’ data

Legal & General is still working with third party managers to agree the collation of their transaction costs and reporting timeframes. It is envisaged that these will only be made available one month after the quarter end on an ongoing basis.

Legal & General funds

We’ve made available a report which provides a list of Legal & General’s internal funds including performance and transaction costs.

Focus on – Stewardship

In the past, it has sometimes been thought that a focus on sustainability (be that environmentally or socially) in investment comes at a cost to returns. We do not believe that this is the case. It is not either/or; sustainability is crucial to long-term returns and the management of many risks.

The IGC has committed to support the voluntary recommendations of the industry led Financial Stability Board (FSB) Task Force on Climate-related Financial Disclosures (TCFD) in a united effort to improve disclosure across sectors and regions. The task force’s recommendations will lead to more consistent, comparable and reliable disclosure of climate related information that will facilitate more informed business and investment decision making. The disclosures are an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to a low carbon economy.

We have also committed to support an initiative, co-ordinated by the 30% Club to promote more women to the senior management and boards of British companies in which they invest. Investors will push companies for 30% of women on FTSE 350 boards and 30% of women in senior management at FTSE 100 companies by 2020.

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Environmental, social and corporate governance

The IGC has reviewed what Legal & General Investment Management (LGIM), the manager of Legal & General’s internal funds, is doing on the subject of environmental, social and corporate governance (ESG) issues.

We wanted to understand the steps that are taken to protect members’ money and what LGIM does to engage with and vote on poorly governed companies.

In November 2017, representatives from across the group presented to the IGC Annual Member Forum. LGIM affirmed its belief that ESG issues such as climate change, labour standards and governance structures can have a significant impact on company performance. This view, which informs its 5-year ESG targets, is available here.

On environmental matters, the IGC has received updates on new low-carbon financial funds being developed, as well as the Climate Impact Pledge under which Legal & General will engage with over 80 of the world’s largest companies on the topic of climate change.

In the social and governance sphere, LGIM has presented its voting and engagement activity to promote gender diversity and reduce income inequality. We were impressed by a collaborative project with a number of major US and European investors focusing on companies with poor gender diversity, as well as LGIM’s engagement and voting action with the aim of curbing excessive levels of executive pay.

LGIM’s view is that, as a large index investor, it has an interest in raising governance standards across entire sectors and markets. They engage with individual companies, but also with regulators, policy-makers and other investors, on topics such as board composition, listing rules, audit, reporting and transparency. LGIM has reaffirmed its commitment to vote consistently and not to abstain during shareholder votes.

During the IGC Annual Member Forum, we were given examples of votes against poorly governed companies, and of management changes resulting from such engagements.

In addition, Legal & General has made the LGIM managed Future World Fund available to members. It was created in response to investors’ concerns over the risks associated with climate change.

IGC view

The IGC is pleased that Legal & General takes sustainability and ESG matters so seriously and commits significant resource to these vital issues. More can always be done but we are confident that Legal & General will remain a market leader in this area.

Focus on – FeedbackThe IGC made member and employer feedback a major focus of its work last year. The principal elements have included:

Member research

In 2017, together with a number of other IGCs, we took part in the IGC value for money benchmarking analysis. The results will help us to benchmark the member journey against other pension providers in the marketplace.

The findings across six areas (security, engagement, investment, access, service and charges) showed us that Legal & General’s Workplace scheme members were benefiting from a wide range of engagement tools, suitable options at retirement with sufficient flexibility, good administration response times and low charges.

The recommendations highlighted that increased oversight should be applied to legacy default investment strategies and a need for member advice or guidance; it also reported that some improvements were needed around helpline response times. It was reassuring for the IGC that these were all areas which were already under review and we have since overseen action plans, developments and progress in all these areas.

Fact finding meetings with employers

In early 2018, members of the IGC met with a small sample of employers who have contract based, Workplace pension arrangements with Legal & General.

The employers we spoke to considered Legal & General to offer good value for money and be competitive but that there were also some areas in which improvements could be achieved.

Overwhelmingly, they rated the Cardiff administration and call-centre teams highly, especially those who had visited the offices. Enthusiasm and willingness to help and support were commonly used phrases, as well as ability to manage complaints well.

Most felt that the flexibility and detail of regular governance reporting could be improved; whilst bespoke reporting can be delivered, it takes a relatively high degree of time and effort from both the employer and the administration teams.

Another point which came from these extremely useful and valuable meetings was that some of the employers that we engaged with found the contribution upload process cumbersome, and there was a perception that there was a need for further investment in the systems and underlying processes.

These are issues that the IGC has already raised with Legal & General. For the short-term we have been provided with assurances on the system scalability but we too have been concerned about the longer-term commitment to sustainable system improvements, which impact on servicing, governance and reporting.

We understand that Legal & General has now committed to major investment in systems although we await an indication of timescales involved.

Legal & General’s client relationship managers were also very well regarded. The conversations took place at a time when a re-organisation of the relationship management team was underway. Whilst some were sorry to be losing a trusted relationship manager, they were appreciative

of the reason for the re-organisation. The IGC subsequently spoke with the Head of DC Client Management to fully understand the rationale for the changes and is satisfied that the changes will deliver a better focused and more pro-active service to clients.

Most of those who we met are regular attendees at Legal & General’s DC User Group meetings, which are highly valued for the opportunity to meet with other employers and to discuss issues directly with Legal & General. A challenge was raised, however, that the response to some of the issues that are raised in this forum sometimes appears slow. The IGC is regularly represented at this group and recognises its value to participants. We will look more closely at the way issues are subsequently dealt with.

They were generally complimentary about communication materials. They welcomed recent improvements including the look and feel of the materials, as well as the member journey theme, but suggested more could be done including improvements to websites and Manage Your Account (MYA). There were varying degrees of enthusiasm for an ‘app’ but a consensus around needing to improve generally in an increasingly digital age, and to provide a broader range of financial planning tools and support to members.

As discussed above in Criteria 6 – Communication, Legal & General has committed to significant enhancements in digital communications and to an overall financial wellbeing approach.

A number of the employers we spoke to attend the DC Communications Working Group. As with the DC User Group, employers value the opportunity to contribute to communication developments and to know that their input is taken into account.

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All employers we spoke to commented on low member engagement: only very low numbers actively use Manage Your Account, very few members self-select investment funds, and there is little or no interest shown in environmental, social and governance matters relating to investments. This is not unusual, particularly amongst significant auto-enrolled populations. However, it is something that the IGC is keen to improve and continues to work with the Legal & General communications team to explore and try to engage the members.

As anticipated, all employers confirmed that the majority of members were in the scheme’s default arrangement, be that a bespoke default or Legal & General’s standard.

Some employers have member funds in legacy defaults and are keen that Legal & General should find a solution that will enable existing pots to be moved to current or future default funds. They understand the regulatory barriers and are aware that Legal & General is exploring options with the FCA, but they would like to see more progress being made.

Overall, the view of Legal & General from the employers with whom we spoke was positive. They believe that Legal & General is a good partner, offering value for money and is competitive but will need to commit further investment in technology to remain the market leader in the future.

Quarterly employer groups

Legal & General uses the quarterly DC User Group meetings to provide employers with updates on regulatory changes, areas of focus and member communications. At each meeting the IGC is invited to update the employers on our work and hear from employers on areas of potential concern and future areas they would like to see the IGC focus on. This has proven a very useful means of gaining feedback throughout the year and we will continue to attend these meetings in 2018.

IGC Annual Member Forum

In November 2017, the IGC held its second Annual Member Forum. The session was organised and run by the IGC independently of Legal & General.

Around 80 scheme members attended and we were delighted to see that some members attended for the second year running. We provided updates on the progress that had been made during the year and the areas that the IGC is focused on for 2018. We also heard from Dame Helena Morrissey OBE, Head of Personal Investing for Legal & General, on the importance of diversity in effective governance and from LGIM’s Corporate Governance Director, Sacha Sadan, on what Legal & General was doing in the corporate governance and active ownership arena. Details on Legal & General’s active ownership, including the latest report, can be found here.

We had a great response to our request for feedback from the event and we would be delighted to hear further ideas for topics for our 2018 event. If you have any suggestions please do email us here.

How this feeds into our feedback score

We consider the breadth and depth of Legal & General’s and our own efforts to capture feedback from members directly and from employers to be good. For example, we believe that we are the only IGC to hold an Annual Members’ Forum. However, note that we did not conduct additional member research in 2017 which we had said we would do in our last report. As a consequence we have reduced our score to +1.5. Although no new research was done last year, significant work was undertaken to act on the findings of the 2016 research.

Overall assessment of value for money

With an average score close to +1.5, the IGC is confident in saying that we believe overall Legal & General provides fair value for money. In particular the good scores for the appropriateness of the main default investment strategy, the Multi-Asset Fund, and the price and investment returns enjoyed by members using that default, are indicators of good (score +2.0) value for money for those members. The IGC would like to see progress in 2018 that would allow us to report good, rather than simply fair, value for money for as many members as possible next year.

Appendix 1 IGC Members

The IGC has been established to ensure it has sufficient expertise, experience and independence to act in members' interests. This is assessed annually through an evaluation, with the last one having been completed in January 2018.

This evaluation covers the IGC’s composition, an assessment of how the IGC members view their independence and the independence of each of its members and gives consideration to the diversity of its membership, performance, skills and effectiveness.

In January 2018, the Kingfisher Pension Scheme defined contribution section migrated to Legal & General on an OWN Scheme basis leaving accountability with its own Board of Trustees. Kingfisher is a DC client of Legal & General. The Chairman, in his capacity as Secretary of the Kingfisher Trustees, took no part in Kingfisher Trustees' decision making process in appointing Legal & General.

The Independent Members of the IGC have not:

• Been employed within the Legal & General Group during the year or the five years preceding their appointment.

• Had any material business relationship with any company within the Legal & General Group during the year or the five years preceding their appointment, except for being trustees of the Legal & General Workplace Mastertrust.

The IGC is strongly of the view that diversity in the broadest sense leads to better discussion and better decision making and avoids the risks that can arise from group-think. We are fortunate to have a broad diversity of individuals on the committee with a range of personalities, backgrounds, education specialisms, subject matter knowledge (including social responsibility and ESG backgrounds) and careers. Following the evaluation this year, the IGC discussed the findings including, the balance of skills and diversity of the IGC’s membership. We concluded that at the next opportunity we will seek to broaden our talent pool further with a focus on gender and age-range.

The full terms of reference for the IGC can be found here.

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IGC Member profiles

Steve Carrodus, Independent Member

Steve is a Client Director with PTL Governance Ltd.

He has over 40 years’ experience dealing with employers and trustees in connection with Workplace pensions. After 1988 this included advising employers on contract-based pension arrangements.

Through his professional trustee role Steve has extensive experience of governance responsibility relating to pensions and has recent experience with DC Mastertrusts and one other IGC.

Daniel Godfrey, Independent Member

Daniel studied Economics at The University of Manchester and went on to become Marketing Director of Robert Fleming's Investment Trust business.

He has worked in various senior positions including Chairman of pfeg (Personal Finance Education Group), Director General of The Association of Investment Companies and Director of Corporate Communications at Phoenix Group Holdings Plc. He was chief executive of the Investment Association between 2012 and 2015, where he was responsible for a team that oversaw significant growth in the voice of the organisation in governance and stewardship.

Daniel is currently a Non-Executive Director of Big Issue Invest Fund Management, a social impact investment firm and of Digital Moneybox, a FinTech startup. He is an Ambassador of the Transparency Taskforce.

Daniel brings a wealth of knowledge and professional expertise.

Rachel Brougham, IGC Member, Independent Member

Rachel is a trustee executive at BESTrustees Limited. Rachel is a qualified actuary and has worked in the pensions industry since 1988.

Rachel’s experience includes advising both defined benefit (DB) and defined contribution (DC) trustee boards, and the governance committees of various contract-based DC arrangements through which she has built up a detailed knowledge of the regulatory environment.

With Rachel’s previous employer, the global consultant Mercer, she led a number of national initiatives including pension fund governance (both DB and DC) and pensions automatic enrolment.

Having joined BESTrustees in 2014, Rachel’s appointments include two master trust trustee boards and membership of two independent governance committees, as well as a number of defined benefit schemes.

Ali Toutounchi, IGC Member

Ali has over 30 years of experience in investments. He was formerly Managing Director of Legal & General Investment Management’s Global Index Funds, overseeing the management of over £275 billion of assets on behalf of pension funds, institutional and retail investors. As the Client Fund Director, he was closely involved with a number of large UK corporate and public pension fund schemes.

Ali joined Legal & General in 1995 from NatWest Securities. Ali has held senior roles at UBS Asset Management and Wood Mackenzie Stockbrokers. Ali has a first class honours degree in economics and statistics from University College, London, and a PhD in actuarial mathematics from Heriot-Watt University, Edinburgh.

Ali’s diverse and extensive experience of investment, trade execution and working with pension fund clients is of great value to the IGC.

Dermot Courtier, Chairman, Independent Member

Dermot was appointed Chairman of the Legal & General Independent Governance Committee with effect from 1 March 2017. Dermot also acts as Chairman of the Legal & General Mastertrust.

Dermot is Head of Group Pensions at Kingfisher plc. As well as Secretary to Kingfisher Pension Trustee Limited (KPTL), which oversees the governance and the running of the Kingfisher Pension scheme (KPS). Since 2007, Dermot in his executive capacity has overseen KPS’s de-risking programme and the enhancement of DC benefit structures and investment funds. KPS has won numerous awards, in particular for its pioneering financial education programme for DC members.

Dermot has held senior pension roles at Hachette Livre Group, Towers Perrin HR Services (now Willis Towers Watson) and Royal Mail Group. He is a member of the PLSA DC Council. His previous NED role reflects his interest in the local community and infrastructure as he is the immediate past Vice Chair of Curo Group, a social and affordable housing group in the Bath and Bristol area.

IGC Support services

Leanne Cornish, Assistant Secretary to the Independent Governance Committee

Leanne Cornish has provided company secretarial support to the Independent Governance Committee since 2015. Along with Andrew Fairhurst, Leanne’s role is to ensure the IGC operates efficiently and effectively to the highest governance standards and ensures that the IGC embraces and is at the forefront of changing governance practice.

Leanne joined Legal & General in 2015 as a Company Secretarial Trainee having spent four years with Link Group, formerly Capita Asset Services, as a Share Schemes administrator. In January 2018, Leanne qualified as a graduate of the Institute of Chartered Secretaries and Administrators under the Chartered Secretaries Qualifying Scheme.

Sharon Bellingham, IGC Pension Scheme Manager

Sharon was appointed Pension Scheme Manager to the Independent Governance Committee in February 2018, having come from a consulting background and with 24 years defined contribution pension experience.

The Pension Scheme Manager reports to the Independent Chairman of the IGC and their role is to assist and support the IGC in fulfilling their regularly responsibilities; to ensure that the pension schemes administered by Legal & General are of the appropriate quality and offer ‘value for money’ for members.

Andrew Fairhurst, Secretary to the Independent Governance Committee

Andrew worked on the launch of the Independent Governance Committee and has been Secretary to the IGC since its voluntary introduction in 2013. Andrew’s role is to ensure the IGC operates efficiently and effectively to the highest governance standards and ensures that the IGC embraces, and is at the forefront of changing governance practice.

Andrew reports through to the independent Chairman of the IGC and he also has an independent non-operational reporting line to Legal & General’s Legal & Governance function.

Andrew has held a number of senior company secretarial roles within Legal & General Group, is a Fellow of the Institute of Chartered Secretaries and a member of the ICSA’s Company Secretaries forum.

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Asset allocation and all below information as at 31 January 2018

Appendix 2 Dean Wetton Advisory

This paper summarises the conclusions of Dean Wetton Advisory (DWA) review into the suitability of the default strategy, the LGIM Multi-Asset Fund for the Legal & General Workplace members.

Following the introduction of pension freedoms in April 2015, individuals now have greater choices at the point of retirement and this has changed the way pension pots are used and when. Previously, the most common approach was to take the maximum tax free lump sum permitted (usually 25%) and use the balance to purchase an annuity at the chosen retirement age. Legal & General has reviewed actual member behaviour and sufficient time has now passed to reveal that behaviours have changed and that the decisions made by individuals do vary. In particular, individuals do not typically purchase an annuity nor do they know when they are likely to draw their benefits until close to the point of retirement.

The default strategy must be appropriate for this typical member. DWA is in agreement with Legal & General’s belief that the multi asset strategy is appropriate for the following reasons:

• The strategy is risk controlled targeting a risk level of around 2/3rds of the risk of investing in equities (shares in listed companies) throughout a member’s lifetime. The diversity of the fund provides an extra layer of protection in times of market volatility.

• DWA’s opinion of the objective for the fund is to generate a real return of 3% above inflation over the longer term, which is appropriate for both younger and older members.

• In the three years leading up to December 2017, the fund has outperformed the targeted long term return of inflation plus 3% with a level of risk of around 2/3rds that of equity.

• The target level of risk and reward taken is appropriate for a member who does not have a set retirement date in mind or know exactly how they may wish to access their benefits.

• The fund manager, LGIM has a robust process with good talent and a risk averse philosophy.

Compared to other funds in the ABI Mixed 40%-85% equity benchmark sector, the fund has seen yearly returns of 9.2% as against the benchmark return of 8.9% over the last 5 years. In 2017, the fund achieved a return of 9.7% compared to the benchmark’s return of 9.6%.

International equities 39.11%

International bonds 34.81%

UK equities 7.24%

UK gilts 6.58%

Property 6.10%

UK corporate bonds 4.92%

Cash and equivalents 1.15%

Investment trusts 0.80%

Managed funds 0.19%

Other 0.10%

The investment manager changes the investment strategy over time to reflect market conditions. DWA believe that the fund is appropriately positioned to achieve its objectives going forwards.

In summary, DWA believe the Multi-Asset Fund is appropriate for members. The performance of the fund has been good and it dovetails well with the supporting lifestyle strategies that can be self-selected.

Important Notice

Dean Wetton Advisory Limited (DWA) is an Appointed Representative of Red Sky Capital Solutions LLP which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA). Please note that all material produced by DWA is directed at, and intended for the consideration of, professional clients within the meaning of the Financial Services and Markets Act 2000 ('FSMA'). Retail or other clients must not place any reliance upon the contents.

The information expressed herein is provided in good faith and has been prepared using sources considered to be reasonable and appropriate. While this information from third parties is believed to be reliable, no representations, guarantees or warranties are made as to the accuracy of information presented, and no responsibility or liability can be accepted for any error, omission or inaccuracy in respect of this. This does not exclude or restrict any duty or liability that DWA has to its customers under the UK regulatory system. This document may also include our views and expectations, which cannot be taken as fact.

The value of investments and the income from them can go down as well as up as a result of market and currency fluctuations and investors may not get back the amount invested. Past performance is not necessarily a guide to future returns. This document should not be distributed to any third parties and is not intended and must not be, relied upon by them. Unauthorised copying of this document is prohibited.