Thank you, everyone, for joining us this morning. I'm just going to make three very short comments and then open it to questions. First, we're all feeling very positive about our businesses, our pipelines and businesses. Not only is it being robust and resilient during 2020, but we see great prospects for growth going forward. We're also seeing that the perceived risks that many of you and indeed many of our shareholders have are fading away, and we've tried to answer those risks in the presentation. We've retained our progressive dividend policy. We've given greater clarity of that. I'm sure there'll be questions on that, but we've tried to give much greater certainty so that going forward, having a pause year for this year and then low to middle digit growth for the next five years.
I think the third thing in this is that we do have a great team here. We have a great team, a fantastic collaboration between all of the executive team and indeed my colleagues across the whole of Legal & General. As you have seen from the five presentations on each of the businesses, they have huge opportunities to grow. It's really we can self-determine our success, and it's all about our execution capabilities, which have been fantastic over the last 10 years. We're feeling confident about further great execution in the future. Now, we'll now cover questions. Just to alert you, the first question is from Andy Sinclair. The second one, Jon Hocking. The third one, Andrew Baker. Fourth, Oliver Steel. And fifth, Greg Patterson.
There's a whole bunch of others who have put their hands up, so I'm going to encourage people to put their hands up quickly because there is a queue. We're very cognizant that General is starting at 11:00, and we want to try and finish ours a fraction before 11:00 and try and cover as much ground as possible during the call. Thank you. Over to you, Andy.
Thanks, Nigel. Three from me, as usual, if that's okay. Firstly, just on the GBP 8 billion-GBP 9 billion cash generation number. I just wondered if you could confirm if you're allowing for any significant one-offs like longevity releases in that number. Second question was on debt leverage. You've indicated that leverage should come down over the planned period. Just really wondered if you could put some numbers around that, remind us your key metrics and where you'd like to sit on them over the planned period. Thirdly, just on solvency, mid-170s today, you've committed to growing the business, growing the dividend, and deleveraging over the next few years. Just wondering if you can confirm that you can keep the Solvency II ratio at least flat ex-market moves, if not increasing, over the course of that planned period alongside all of that. Thanks.
Yeah. I'm going to answer the first one because that's the easiest question, and I've already delegated the other two to Jeff Davies, who's looking very enthused about it. On the GBP 8 billion-GBP 9 billion, that's without any of the one-offs of mortality releases. I think a lot of people forget that we've generated over GBP 1.6 billion of cash from disposals over the last few years and that the longevity releases are now GBP 1 billion. All of that turns into, pretty much all of that turns into, cash for the group. That's one of the reasons that Kerrigan's got a huge amount of cash sitting within LGC and that we can deploy that cash to help grow the earnings on a go-forward basis. Jeff, do you want to answer the other two?
Yeah. On the debt leverage, we talked about that coming down as the balance sheet grows, which is exactly what's happened in the last year since I've been here. We're very conscious of the rating agency metrics. The one that's historically really been a main focus is the Moody's Adjusted, which runs about 30% for a AA is the limit. We monitor all of those. We're probably there or thereabouts at the moment on the Moody's one. We would see that reducing over time. Our strategy is to let those run down as the balance sheet grows and then to go back to debt markets when it makes sense in order to optimize the ROE, the balance between debt and equity to give the optimal return to shareholders, always staying at or below those maximum levels that are implied for the rating agency. That's sort of 30% dropping below.
I think on average, we've been about 27% over the last four years. Every time I ask Frank, that's the answer he gives me. That's sort of roughly where we aim at being, and the plan shows a similar sort of progression for that. On the solvency, you know as well as I do that obviously saying all things being equal on solvency involves a lot of caveats. Yeah, the summary of what you're saying is the sense that we have. That solvency over that four- five years you've been talking about is broadly leveled. It's that sort of broadly leveled flat solvency we'd be looking at sustaining with those massive caveats that so many things move, but absent market movements, everything else, but building a plan that does that over that period.
Okay. Can we move on to Jon Hocking?
Yeah. Morning, everybody. I've got three questions, please. Firstly, on capital generation. Jeff, in your slide section, there's a chart showing that 55% of capital generation came from LGR. Over the course of the planned period, would you expect the proportionate contribution of LGR to go up or down? Because I see that if you look at the LGIM targets, for example, you've got EPS growth broadly along the dividend, which has suggested maybe LGR becomes more important in terms of proportionate capital generation. Secondly, also in your section, Jeff, you mentioned potential tailwinds to capital generation for risk margin reform and matching adjustment changes. Can you be a little bit more specific about what the expectations are there, please?
Just finally, Kerrigan, in your section, there was a comment about an expected blended portfolio return in LGC of 8%-10%, which seems pretty high given where yields are. How should we think about benchmarking that? Is that a running yield, or is it more of an IRR? What's the way we should think about that return target? Thank you.
Yeah, on LGR, Jon, yeah, I show that proportion. I'd say over the planning period, actually, the LGR contribution is probably level to probably slightly lower, I would say. There's, again, many, many, many assumptions on that, and it depends exact timing of when we see the growth in the other areas. I'd say it's stable to reducing, I would say, certainly not in the core plan accelerating. The tailwinds, risk margin, matching adjustment, yeah, I mean, it was a short three, four-page consultation paper put out by PRA around this. We're obviously in the middle of a lot of the conversations and looking to put forward suggestions as well as working with the ABI around that. We can't put a number on where the risk margin would reduce to.
They're obviously committed to reducing that figure, and that will give us more optionality in how we write new business, how much capital we use, how much reinsurance we use, and we will welcome that. We obviously feed into the process where that risk margin needs to land in order for us to have that freedom around risk management. It's a pure cost of capital decision. The matching adjustment is, in particular, about removing a lot of the operational overhead and then having more freedom in the types of assets that can be invested in, removing some of the straitjacket and requirements that probably don't serve anyone any benefit as long as you have the right risk management around it.
It would open up a more assets universe for Laura to put the money into and for us to develop and create more of those assets as well.
Thanks, Jon. Just on the blended return, yeah, think of it more as an IRR than a running yield. Just to be reminded, your comment, it looks higher relative to yields at the moment. There is a whole range of different assets in there at different stages. We have development assets in there where you would expect to earn, let's say, something double-digit certainly in terms of IRRs, and then some more stabilized assets that are a bit further on the maturity schedule, a little bit lower. It is a blended range of all those that gets you to that IRR-type figure.
Okay. Excellent. Thank you very much.
Oliver.
Yes. Good morning. First question is on timing of the returns over the next five years. I mean, LGIM looks as if it's back-end loaded equally on slide, I think 92. There seems to be quite a sharp drop coming in in the backbook, OSG, from the annuity book. So I'm just wondering if you can give us a bit more guidance as to how the sort of individual years over the next five years develop, whether there's any sort of imbalance there. Second question, coming back on Jon's question about diversification of the business. I mean, if LGR is going to decrease as a percentage of the total over the next five years, which part of the business is actually going to be growing faster than the rest? Because based on the targets you've set for LGIM, it doesn't sound as if it's that.
I'll take the last question, and then if Michelle's going to talk a little bit about LGIM specifically, and Jeff's going to find slide 92 and come up with some detailed comments on it. I kind of hope that's the right way of dealing with it. Do you want to go up just first? Michelle, talk a little bit about LGIM.
Sure. It's a good question. I mean, if you have feedback there. The strategy that we've described today and restated is to modernize, diversify, and internationalize. That's a continuation of the foundations that the business has laid over the last few years and really using those capabilities. What you are going to see, which I think we've been clear about, is we are going to continue to invest in the business. We think that's an appropriate thing to do, and that's in all three of those pillars. You will continue to see an elevated cost-income ratio for the next couple of years before that trends back down again. The growth that we are also looking for, and we are ambitious for, is in line with, as we've said, with what Jeff has said today as a restated ambition for the group dividend.
Yeah. Just going back to the group in its entirety and relative growth rates, if we go back to our plans from five, six, seven, eight years ago, we had pretty much balanced growth in those plans. The variance typically is, let's say, between 6% annual growth and 10% annual growth. What happened was that Laura's business and Chris's business both had much bigger opportunities than we thought they would have, and the PRC markets opened up much bigger, and the turnaround that we've had in Chris's business has been huge. That resulted in 20% plus growth. They're clearly not going to grow at that level going forward. Similarly, LGI grew at 2%, whereas actually we think from where it is today, it's got very good growth prospects both in the United States, where early results are very promising, but also in the adjacencies of the business.
LGM has managed three over a number of years. Michelle's been here a short while. We had a lot of changes to the management team, spending a lot more time on the operating economics and investing in further investing in activities which make us a bigger, more robust business and a better platform to expand internationally and modernize and diversify, as she talked about. LGC grew at double digits for the last five years. I mean, there's noise this year in the performance, particularly on the housing side, but we very much see that as a very high-growth business going forward because it has so many options for growth and starting afresh in lots of areas. You don't have the legacy issues that several of my colleagues have to deal with on a monthly basis. Jeff looks as though he's now fully researched page 92, so.
Yeah, Oliver. No, I mean, there is not a drop in OSG that comes from that. As I said in the self-sustaining part of the presentation, even when we reach that self-sustaining level, then we see growth in that underlying LGR portfolio for 20 years beyond that, just writing the GBP 10 billion-GBP 11 billion that we talk about. The OSG grows broadly with that portfolio if you think it is really its credit spread unwind and capital release. As you see growth in the portfolio, you continue to see OSG growth. Clearly, the speed of that growth depends on the mix of business you write, the thirds, etc., how long the duration is. We still see that underlying growth in it, and there is no drop off.
Okay. Thank you.
Thank you. Can we move on to Andrew Baker, please?
Hi. Thanks for taking my question. Three from me, please. First one is on the GBP 8 billion-GBP 9 billion capital generating target. This excludes new business strain. I can see that you have included new business strain. The target is just to grow surplus in excess of dividends. Are you able to give any insight as to how much you expect capital generation after strain to be in excess of dividends over the planning period? The second one is on the cash target, GBP 8 billion-GBP 9 billion. This is based on the net release from operations, excluding mortality releases. Can we expect actual remittances, so internal dividends, to be roughly in line with this? Thirdly, are you able to just give a quick update on the U.K. PRT competitive environment? Specifically, you have seen some ownership changes or additional capital from your peers.
Has this changed the competitive dynamic in any way? Are you seeing any potential new competitors looking to enter the space? Thank you.
Okay. Thank you, Andrew. Jeff, do you want to answer the first two, and Laura can answer the third question?
Sure. Yeah. Hi, Andrew. As you say, part of our target ambition is to manage the business such that the surplus generation is greater than the dividend, as we've shown we've done from 2016- 2019, whilst writing sort of GBP 34 billion of annuities. There is a wide range there depending on how much we manage the strain versus the dividend. As you can appreciate, if we're at the 3% or the 6%, it means a deviation in the dividend. What we've done is we put the numbers there. You know the volumes. You know what the average strain looks like. You can project those out. We will be very capital efficient in the business we write. We will continue to pull the levers as appropriate. This year, we've been very efficient on the capital used on the PRT business. The sort of circa 4% strain still holds.
We've probably beaten that this year. You can apply that to the GBP 40 billion-GBP 50 billion. That gives you an answer. You get a number above that. There are so many variables in that that we felt it did not make sense to give a target on that. We will manage it. Obviously, as we are going through, we will manage that number. The net release and remittances, I mean, there is a bit of a yes and no is the answer to that because our usual comment is that we bring as much out of the insurance company, out of LGAS, as is required. We do not necessarily want it to sit in a group. A lot of that is the net release in respect of LGI and in respect of the annuity business.
Obviously, we pay a dividend across from the U.S. for that part of LGI as well. Of course, for LGIM, the answer is yes because the vast majority of profits, which are also their version of net release, are simply paid up. To the extent that there are net remittances from LGC, that would be helpful. Of course, we are investing in that business to grow it and get more assets under management, and that is why we are trying to put the capital to work alongside the PRT business.
Thanks, Jeff. Laura?
Yeah. Thanks, Andrew. I mean, as you rightly point out, we're aware that a couple of our competitors have had sort of new ownership and new capital put in. Do we expect that to change the competitive dynamics of the U.K. PRT market? Not particularly. I think as we cover in the presentation, we're expecting sort of that there could be the potential of GBP 240 billion of PRT coming to market over the next five years. I think in that context, we are still pretty happy with our competitive position. I think the other thing we cover, we are still the only player in the U.K. market that is whole of market, so is covering sort of from the smallest to the largest schemes, and sort of don't expect that to change too quickly.
Thank you. Laura. Greig?
Yes. Morning, everybody. Hope everyone's safe. Three questions. One is of the annuity assets, and when I say this, I mean the traded portfolio and the direct investments. I was wondering what the amount or percentage is in the bucket immediately above BBB- because you mentioned BBB- , and what are the sort of collaterals and the risks there of downgrade. Second question is, I wonder if you could just remind us of what percentage of the annuity portfolio is currently in, what do you want to call it, direct liquids private debt, and what you see the optimal level at the end of the planning period. In other words, to what extent that you can increase that. The third question, I note that you've mentioned this before. You speak about this launching and developing this insured self-sufficient and assured payment policy.
I wonder if you could just remind us what that brings to the table. Is that something to do with the pension super funds, and is that in response to the pension super funds, or what are you doing there? Thank you.
Jeff answers the first one, and Laura answers the second and third one. I think that's probably the best way of pulling that together. Jeff, do you want to go first?
Sure. Hi, Greg. Yeah. In terms of credit, I mean, the overall, we give the breakdown. You can see the total BBB is roughly a third of the portfolio, 33% or so at the half year. The one we focus the most is the BBB- , where we give the 3%. In the BBB+ , I think it's probably broadly equal, but we could give that breakdown. I do not think it's not that sensitive. A lot of where we look to invest would be BBB+ or very resilient BBB because we obviously want to avoid that chance of moving to sub-investment grade where we can. We are happy where we are and the names in those and the type of bucket. Even more so with the DR, where I think we talked before, when we're looking to go into those investments, we look for very, very resilient.
We would push back on BBB- . We would almost anticipate what is the risk of this downgrade. If it was downgraded, would we still invest in these 25-year investments? We tend to be aiming more at the higher end of the rating categories when we're looking at the DI.
On the second one.
And the DI together, yeah?
Yeah.
Yeah. That's the total portfolio on the—sorry, I did have the slide number. I just closed it.
Thank you.
On your second question, Greg, at the moment, we're about 29% of DI in the portfolio. Assuming that there are no changes to the MA, as Jeff said, that we expect there will be some, we would be quite happy to go up to about a level of 50%, taking into account the capital benefit that MA gives us. If the MA rules changed a bit, we might increase that. On your questions on ISS and APP, I guess, yes, they are—you could potentially think of them as competition or products that could be competing with the consolidators. They do not give the whole buy-out or buy-in, but they certainly help schemes on their way to buy-out or buy-in by giving them protection.
Also on the APP, sort of locking into assets is effectively ensuring the asset returns of the scheme, which then gives them a nice path to buy-in or buy-out.
Yeah. Thank you. I mean, Greg, if you remember, investment-grade credit hardly ever defaults. I mean, it's usually a fraud or something that causes the default. We've still got our GBP 3.5 billion credit default reserve. We've never used it in all the years that certainly I've been here. We've only had one minor default, GBP 23 million, back in 2008 against a portfolio of GBP 80 billion. That's a combination of either the skill of our LGIM colleagues, but also the nature of the Solvency II regime, which is structured in such a way that it results in very high-quality assets going into the portfolio with a high degree of certainty around their cash flow. Move on to Gordon Aitken now, and then Andrew Crean.
Yeah. Thanks. Three questions, please. First, on the dividends, you're holding it flat in 2020. Pretty good in the context of U.K. PLC, but I know myself and others had penciled in some growth in the final. Just can you talk us through the decision? How much of that is due to pressure from the regulator, maybe social and media pressure, and how much of it is driven by cash generation pressure? That's the first question. Second question is on mortality. Your duty move to CMI- 18 for projections in the 2020 numbers. Now, CMI- 18 was, as you know, six months of reduction, three months of life expectancy, three months of smoothing against the CMI- 17, which was just two months. Just flat earnings, the target you've given, does that mean you're going to hold some of CMI- 18 back? And the final question is to Laura.
You talked about that PPI forecast for the U.K. bond market over the next five years, GBP 240 billion. I know you said it was at the top end of your expectations, but that could require, in very simple terms, about GBP 20 billion of capital. I know some of that will obviously come off back books. Given the numbers, the forecast that you've said, you're going to be writing about, say, 17%-20% of that. That's a wee bit lower than your usual market share. How do you see the market panning out? Who's writing the rest? Would you encourage third-party capital into this space? Thank you.
This is the second one, and Laura does the third one. I mean, the discussions with the regulator have always been very constructive and open. They have gone through a process with ourselves, with M&G, with Phoenix, which is very similar, just looking at various forward projections, lots of sensitivity, exactly the process that we go through with our board. We listen to shareholders a lot as well in the discussions that we had. The shareholder feedback was very much in line with what we have actually done, which is zero for this year. We thought we had flagged that pretty clearly at the half year when we said the choice was really zero or seven.
Given all the circumstances that were going around, it was unanimous at our board and indeed across the executive team that we should go for zero this year and then have a progressive policy going forward where we provided lots of details on that. We are cognizant as well of the current yield on the shares, which is extraordinarily high, a massive premium to the FTSE 100. We have to believe that we've got better prospects than the majority of the constituents of the FTSE 100, as we've absolutely shown over the last 10 years. Hopefully, you'll all get time to listen to my colleagues' presentations because they really cover a lot of detail, the opportunities, which we usually don't get the chance to do when we're doing the year-end results. That is why we're very optimistic for all five businesses right now.
We have great teams, great opportunities. We've got the capital. We've got the bandwidth to execute on these. The doors that we're beginning to open up are opening up even further right now. Jeff, do you want to answer the second, and Laura?
Yeah. Sure. I would not characterize it as holding back, Gordon. On the other hand, we have looked at where does CMI- 19 take you. Obviously, that would not be as far as the full CMI- 18 that you talk about. We have looked at the level of uncertainty in 2020, and not so much in a risk way as just a lot of noise in the data. A prudent implementation of 18 with a view of what 19 was telling you, and probably a change of approach, which we may well talk more about in terms of thinking, what does 2020 look like? What are now the drivers of change? Can we just disaggregate a lot of what happened in underlying flu from COVID, from other causes in 2020? That is going to take quite a while to play out.
We want to understand a lot of that a lot better before we use the full potential of what could be there for some of these, but equally, we want to fully understand the drivers. It is not any particular concern about it. I would say it is more let's understand what's in 2020. The days of just implementing a table, I think, have gone for a while while we clean up what's happened in 2020. We will be in the start of 2021, I am sure, obviously, as well. It is just a slightly different approach whilst implementing 18 in a prudent way with a view to what 19 tells us.
On your third question, Gordon, as you say, the GBP 240 billion, and I think, as we say in the presentation, that seems at the sort of upper end of what might happen, but I guess in theory it could. In terms of who we see as being our competitors, it is the usual suspects. We are seeing some of the more, I suppose, traditional U.K. insurers being a little bit more active than they have been over the last few years. I think, as we've sort of covered and implied, ever since Solvency II, we have been using reinsurance to manage capital.
We are seeing more sort of quota share stroke sort of asset reinsurance players coming into the market to support the sort of the names that you would recognize sort of doing the front end of the deals. I would expect that to continue, all else being equal with Solvency II.
Thank you. Andrew.
Morning, all. Three questions also for me. Firstly, you talked about increasing the direct portfolio behind the annuities from 29% to 50%. What yield pickup does that imply in terms of the if you did it overnight, how much would that increase your profits? Secondly, you talk about operating capital generation of GBP 8 billion-GBP 9 billion and a dividend of sort of GBP 5.5-GBP 6-ish. The difference there is presumably the strain, new business strain. If you do GBP 40 billion-GBP 50 billion in the U.K. and GBP 10 billion in the U.S., even using just your 4% capital, that would use that difference, which would mean that it implies that the Solvency margin would slowly depreciate down. Why do you think you can keep the Solvency margin in the 170s if you write that amount of business?
Thirdly, sounds a little bit of a silly question, but what are the key drivers which would determine 3% dividend growth versus 6% dividend growth?
Why don't I go through the first one? Because this depends really on lots of factors. We would typically see premiums in the 50-150 basis points, which is a I've got colleagues looking at me here around that. That is very much what I think we can deliver. They're beginning to nod now, so I'm a bit happier about that. That is the sort of numbers that we're looking at, Andrew. Now, we don't get to keep all of that. We get to keep it if we retrospectively do something with the backbook, which is still an opportunity. If we create assets, put them in the backbook, we would keep all of that. When we do it in the front book, we give a proportion of that to our customers. We reward ourselves with a proportion with customers.
We do see the opportunity for many, many new asset classes. Jeff mentioned that very briefly in one of his answers to his questions. Laura, myself, and indeed the rest of the team have been looking at all the new emerging asset classes. Affordable housing is one. Build-to-rent housing is another. SciTech is another one that we're very excited with. We saw the Life and Mind building in Oxford happening. We've obviously got the Sky- NBCUniversal happening as well. Life sciences is going to be another very exciting area. The whole area of climate is going to produce a ton of assets for us on a go-forward basis. We are very confident of having a yield pickup. Why does not Jeff have a go at two and three?
Yeah. Hi, Andrew. Yeah. I mean, it's just at the top end of your range. I mean, right in the GBP 40 billion-GBP 50 billion, and don't forget the 10 is in dollars in the U.S. Does leave that as slightly positive in terms of total surplus. It's very dependent in the model, as we sort of showed on the self-sustaining portfolio, the difference between what's being released from capital in the backbook that's then funding the capital of the new business in terms of what happens to the ratio rather than just looking at pure surplus numbers. The mix between capital and own funds is very important within that calculation. If you look at those applying the 4%, applying a bit more than, you do get at the top end of the range, it looks balanced.
Obviously, at the bottom of the range, we will have levers, a bit like your second question, the levers between a lower dividend versus more strain, etc. We do also say in any period, it may not hold in a single year. I mean, interestingly, if we write more business faster, then you get to the self-sustaining portfolio quicker. There is a benefit in doing that. We weigh that up at each point in time. Obviously, we'd explain our thinking if that's the route that we go down. We're confident that all things being equal and all the caveats I gave to Andy at the beginning, you do end up with a reasonably level trajectory in that. In terms of what drives the dividend, we have the progressive dividend policy underlying the numbers that we talk about.
We continue to look at our underlying IFRS metrics, our core metrics, the net surplus generation, what is that sustaining, as well as an eye to, in certain stress and scenario, Solvency II. It is very much the progression. I mean, this year, we said operating earnings is going to be pretty flat. We have gone with a zero growth on the dividend. We would look through over the planning period, and that is exactly what we provide to the board. What is the affordability in a single year? What is the confidence in the next year? What does that look like in different scenarios? There is not a single metric that will say if that is lower in one year, then we will be at the lower end of the range. It is more a case of what does the trajectory look like? How resilient is that?
Are we delivering in line with what we put together in the plan? If we're not, can we catch up? Is something else outperforming? It can't be, I'm sorry, but can't be more specific on a single metric for that.
One of the others is that Laura's and her team have just done an outstanding job this year, in particular in terms of capital efficiency. If you were very quick, you'll have picked up Jeff mentioned that in the second half of the sentence about 20 minutes ago. We are definitely seeing that we can develop new ways of improving the capital efficiency, which, again, if you compound that over a few years, that does give us a bit more upside. Is there anything else you want to add to that, Laura, or not?
No, no. I guess the only thing I'd add in terms of this year, we've been able to use the volatility in the markets to get very good metrics, capital efficiency, and pricing for our customers.
Before we go on to other questions, a couple of questions have been emailed in from one of them is for Bernie. Can you just give a bit more detail on the plans for the United States and why you're so bullish about the prospects for America? By the way, this isn't a question from Andy Sinclair, so.
Sure. Yeah, I mean, I think what we've done well in the U.K. is apply tech and data in our U.K. retail protection business. The evidence of that has been growing strength. We've been delivering growth consistently in mature competitive markets. Throughout the pandemic, we've been continuing to deliver growth. Our new business profits are growing as well. We've been demonstrating already the benefits of that strategy. In the U.S., obviously, a much bigger market. We've got a sizable business but a relatively small share. It's less digitized. It's a more analog market. That, in simple terms, is where we see the opportunity: applying all our learnings and capabilities from the U.K., obviously adapting them as appropriate for the U.S. market.
It is just wide open with many opportunities for us to really digitize and open up some operational leverage and to create much stronger competitive advantages and therefore deliver much faster earnings growth, which, as LGI, we are very focused on doing. Very happy with the consistent growth in revenue and profits, but not happy with the pace of that operating profit growth in particular. Our tech and data strategy, as I cover in my video, is all focused around, yeah, delivering much faster delivering growth in the U.K. and then much faster growth in the U.S. and from our emerging fintech portfolio where we are using tech and data to transform in our adjacent markets as well.
Thank you, Bernie. Steven Haywood from HSBC.
Thank you very much. Good morning, everybody. Just a few questions from me as well. I think going through your presentations, there is a lot of talk about growth, internationalization, acquisitions in adjacent markets, replicating retirement solutions internationally. Could you give a bit of a sort of more clearer picture on how you are going to internationalize? What adjacent markets are you looking to grow in? What businesses that Legal & General has currently in the U.K. would be best suited to each market in the future? Secondly, you are talking about penetration into the wealthy retirees. How are you going to do this in the U.K.? Are you going head-to-head with St. James's Place, Quilter, etc., or are you targeting this from a lifetime mortgage perspective?
Finally, from me, there's a comment about climate in your presentation, adding 5% to your operating profit over five years, and this is above your plan projections. Can you explain how and what is going to happen here? Thank you.
Few answers to some of these questions. On the first one, just to give you a flavor of what we're thinking through, I'm going to get Bernie to talk about Salary Finance and adjacency and get Kerrigan to talk about the housing situation. In the area of wealth, Chris Knight will cover that for his business. On climate, if Laura and Michelle can each talk about what they're doing in their respective divisions around the opportunities they have. Over to you first, Bernie.
Great. Thanks, Nigel. Yeah. In my video, I've given some more color on the Salary Finance investment. We own just over 40% of Salary Finance, which is a really great business in the financial well-being platform space. It's number one, clearly, in the U.K. It has acquired the assets of its major competitor in the U.K., and it's started to grow and expand in the U.S. We see it's got real potential as a global fintech leader, actually, in the employee benefits, employee financial well-being space, which is a very important area of growth at the minute. I'd say Salary Finance is a good example of both an adjacent market in terms of employee benefits. Obviously, we're very active in that across both LGIM, LGR, and LGI with our group protection business, one where we've got international potential there, particularly our investment in Salary Finance.
I'm just going to pick up on the housing and some of the adjacencies there. I think the interesting markets for us, well, we all know about the structural shortage in housing in the U.K. across every dimension that you can think about, so by tenure, by age, by affordability. That's why we've really been thinking about expanding in affordable homes. That business is going very well with the aging demographics, expanding our later living businesses with really great operational businesses there now. Within build-to-rent, clearly, we've had an urban build-to-rent product for some years, but really looking at suburban build-to-rent, so the need for family homes in the suburbs, if you like, as a rental proposition. That's the true adjacency there in terms of how we can build out those housing businesses, which have compound effects on the group, of course.
It's not just about the shareholder fund returns. It's creating stabilized assets for LGR that helps improve the yield on that portfolio, or indeed working with Michelle on assets for LGIM.
Yeah. Thank you. Yeah, I think generally speaking, across our current businesses, we have good positions. Around 20% is the magic number. We have about 20% market share of the individual and annuity market, which has been remarkably resilient given very low interest rates. We have a 20% share of the native life lending market or the housing equity release, which is a huge potential for growth. Along with LGIM, we have a 20% or so share in the workplace and the DC pensions market, which is growing very rapidly in the accumulation phase. We're going to see in the next few years it growing very strongly in the de-accumulation phases as well.
I think our heartland has traditionally been the sort of mass market, mass affluent market, but we are seeing a lot of development working with partners like SJP and others to bring our product to a slightly wealthier audience. For example, on housing equity, we are seeing a lot more advisors and their customers use equity release as a sort of liquidity tool, a family wealth planning vehicle. We see that continuing a lot next year. On the retirement income side, a lot of pension pots, especially those in the DC world coming to retirement now, are relatively small. Sub-GBP 30,000, they get cashed in. If we can help people as we are accumulate pots of GBP 50,000 or more, obviously GBP 100,000 or more, they see them much more worth doing something with.
We're seeing much better success in that area to provide higher margin products like annuities and like lifetime mortgages to those customers too.
We won't talk about high margin products when you go through the climate stuff, Michelle. Will you also comment on the high margin products that we're going to pivot towards?
Yeah. No, I'd love to. Actually, just on international, if I could, because I think it's a really important future strategy for LGIM. European wholesale is something I'd add to, I'd say, expanding in the U.S. beyond corporate DB and also selectively in Asia. On climate and related, Nigel, I think in terms of we run GBP 174 billion today in ESG-related products. Climate is important for us. We have a really excellent investment stewardship team. One of the things we are definitely seeing is more engagement with companies and helping them think through their response to climate change. In climate-tilted products, particularly on index, this week we launched a Clean Energy Fund ETF. I think in the round, it's extraordinarily important to us.
More broadly, in terms of higher margin products, which I do refer to in my presentation, we've seen, I think, a bifurcation in the market between index on the one hand and the more specialized areas on the other. The good news is that LGIM plays across those areas and, importantly, is able, I think, to blend those together because we have fantastic solutions, capabilities. Maybe just to point to a couple: active credit, private credit, ETFs that are tilted, and real assets more broadly. Nigel, I think that just wraps it together with that underlying ESG ethos, which I think goes across the entire company.
Thank you, Michelle. Laura?
Yeah. From an LGR investment perspective, I mean, I think recent figures I've seen suggest that to get to net zero by 2050 in the U.K., we're going to need sort of GBP 50 billion per annum investment now, rising to about GBP 105 billion by 2030. I think, as I cover in the presentation, we're a very obvious long-term investor in renewable assets and intend part of our strategy is to be working with LGC to create the types of direct investments in the renewables market that we can invest in, create extra direct investments for our business, but also help the trajectory towards net zero by 2050.
Thank you. We're going to have one last question from Ashik, and then I'm going to give a summary so that all of you can get away in time to get on to the general call. Ashik?
Thank you. Good morning, Nigel. Good morning, Jeff and team. Just a couple of questions I have is one on the debt leverage. Do you have any pound sterling amount in your mind as to how much you want to delever over the next, say, three-four years in terms of sterling amount? I mean, it's obvious that natural progression of earnings and earnings retention will help delever. Any thoughts on the absolute amount? Secondly, I think the comment around moving some MF portfolio more into direct assets was very helpful following any Solvency II review into new U.K. solvency regime. Are there any hurdles that you expect to happen in that switch, especially on the back book rather than on the front book? Thank you.
Okay. Have you got three or two, Ashik? Sorry.
Just two. Just two questions.
Just two questions. Okay. Jeff answers the first, and I'll answer the second.
Yeah. No, we do not, I mean, we do not have a sterling number as such we target. As I described, it is very much balance sheet growth, which reduces the leverage ratio. We then look to optimize ROE by getting the right balance between debt and equity. Over that period, it very much depends on how that plays. We would obviously see balance sheet growth over that period. We would see potentially the number being roughly the same plus a bit over that period. It would not change that much depending on the size of the book value growth and what feeds into the rating calculations.
On the regulatory capital, indeed, the relationship with the regulators around this, I mean, we're having probably the most constructive discussions we've ever had on assets with the regulator because there's just a widespread recognition in the U.K., at central government, at local government, the Treasury are all being hugely supportive of the things that we have been doing, that we've been going on about for about 10 years now. ESG, climate change, regenerating towns and cities, building affordable housing, build-to-rent housing, investing in the life sciences and things like Life and Mind are all things that we've been doing for a long, long time. There's a great recognition that we need more of that, not less of that, particularly with the local multiplier effects that we're seeing and experiencing right across the U.K.
From a regulatory point of view, the regulators are happy because we're getting extra diversification across. There are no issues about increasing the amounts of DI and going into more asset classes because that's both in the interests of our solvency ratios, but also from a customer point of view, an economic viewpoint, and a competitive point of view because this, of course, gives us a competitive advantage in the marketplace because we are the only firm that has synergies between the likes of its businesses. Everybody else is pretty much an monolithic competitor. We feel very confident about our capability to both originate and use those assets that are opening up to us. Just in summary then, we've never had such good opportunities, or such great opportunities since I've been here.
We have now got an absolutely outstanding team, not just my colleagues who are here on the call, but actually my colleagues who are sitting right across the businesses. We have some unbelievable people with deep subject matter expertise in all sorts of new opportunities. Those opportunities are not going to go away. They are going to get bigger over the next few years. Jeff and the rest of the team have developed incredibly robust and resilient capital models for us and capital efficiency for us as a group. We have a very, very strong balance sheet today. We are delighted with the cash flow. We are delighted with the capital generation. Probably for the first time since I have been with the group, we have real competition for capital across the company, which is great.
are so many if you go through the five presentations, you'll see so many great ideas. Jeff and I have weaned out a lot of ideas during the budgeting and planning process. There is still a huge number of very exciting things where the markets are opening up. We have definitely got tailwinds, which this rising tide is lifting, certainly the L & G boat. We feel very confident about the future, notwithstanding that we are in the middle of a pandemic and Brexit is far from being finished because we are just really, really strong believers in these six macro and demographic drivers of our business. 2020 is further evidence of that. We are looking forward immensely to the opportunities that we have in 2021 and beyond. Thank you everyone for listening to the call and asking such good questions.
I'd encourage you all to listen to the video, see the slides, study it, and engage with all of my colleagues, not just Jeff and the team, but all of my colleagues are here and willing to answer all of your questions. Be safe, be happy, and look forward to seeing you, if not later this year, certainly in 2021. Thank you.