Cheers: Oxford University has a £4billion partnership with Legal & General
The University of Oxford is almost a thousand years old and its origins date back to 1096. Next year, when the Life and Mind Building opens on campus, it will be the largest building project ever undertaken by the university and its most major center for education and research.
The building, intended to boost Oxford’s science capabilities, is being funded by Legal & General as part of a £4bn partnership with the university, involving new staff and student homes and facilities improved throughout the city.
Legal & General has long been seen as rather boring, a British insurance business whose rhythms rise and fall with the wider economy. The truth is rather more nuanced. Yes, L&G is one of the largest pension fund managers in the UK, but half of that pension division’s assets are international. The group has a growing business in America and a branch dedicated to “alternative” assets, including the Oxford joint venture as well as retirement villages, clean energy, data centers, urban regeneration and affordable housing .
Shares in the company are £2.55 and are set to rise as it benefits from changes in the pensions market and chief executive Nigel Wilson continues with its strong five-year growth plan. Shareholders are also benefiting from generous dividend payouts, with a forecast of 19.4 pence for the year just ended, putting the stock on a yield of over 7.5%.
L&G is expected to generate operating profits of around £2.8bn for 2022, of which almost 70% will come from its pensions business. As part of this, the group is expected to generate around £600m from managing pensions, life insurance and other savings products for individuals here and in America. The rest – more than £1.2billion – will come from managing company pension schemes.
The UK alone has nearly £2.5trillion in so-called defined benefit pension liabilities, where companies have promised to pay employees fixed annual pensions throughout their retirement. Very few of these schemes are still open to new members, but thousands have been set up over the past decades and the promises made to staff must be kept.
The situation is similar in America and many companies here and there have concluded that managing large pension plans is complex, time consuming and best left to experts, such as L&G. Over the years, the group has built a reputation in this area, taking over hundreds of schemes with combined pension liabilities of almost £80bn.
Now brokers expect a dramatic change in business, with an increasing number of companies ceding their defined benefit plans to L&G.
The market is complex. Highly qualified actuaries need to determine how long people are likely to live and how much money companies will need to invest now to be able to pay pensions down the line. Bonds are considered the safest investments for these plans, but when interest rates are low, returns are minimal. This means that companies must either invest more money to finance their programs or find themselves in deficit.
Many companies have gone down the deficit route in recent years as interest rates hit historic lows. Now the tide is turning, pushing bond yields higher and helping plans get stronger.
This presents L&G with a great opportunity. Many companies are desperate to sell their pension plans to large operators, but sales have been dampened because the group will not accept very loss-making plans. Now that the situation is changing, the business should pick up speed, with experts predicting that sales of defined benefit plans will increase by more than 30% over the next four years. L&G is uniquely positioned to benefit from this and similar trends are expected in the US.
Companies are also increasingly inclined to offload pension liabilities following the defined benefit debacle last fall, when schemes had to collapse after Liz Truss and Kwasi Kwarteng’s ill-fated mini-budget. .
Brokers expect this shift in the repo market to drive L&G’s bottom line, with profits rising from £2.8bn to £3.8bn by 2026. Dividends are expected to rise in sync, with 20.3p for the current year, rising to 23.6p in four years.
But L&G is not limited to pensions. The company has a thriving fund management business for large institutions and individual savers.
Wilson is justifiably proud of his group’s investment in a wide range of assets, designed to fight climate change, increase the supply of affordable housing, improve city centers and promote advances in science and of health.
Initiatives include investing in the regeneration of Sheffield; contribute to the financing of a science and technology center in Newcastle; delivering a net zero retirement village in Bedfordshire and building affordable homes nationwide.
Midas verdict: Legal & General has its roots in 1836, when Sergeant John Adams, a judge, set up a company to provide life cover for lawyers. A year later, he and his co-founders decided to offer insurance to the public and Legal & General was born. The company retains remnants of that past to this day but, valued on the stock exchange at over £15billion, it has exceeded its founders’ wildest dreams. There’s still plenty of growth to come and the shares, at £2.55, should offer long-term rewards, complemented by generous dividends.
Traded on: main market Teleprinter: LGEN Contact: group.legalandgeneral.com or 0370 707 1399
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