State of the nation.


The ‘Triangle of Austerity’

Our view of the world is that we see a number of developed economies in which we operate are locked in a “Triangle of Austerity”:

  • Fiscal austerity as governments cut spending
  • Regulatory austerity as risk is reduced, and
  • Funding austerity as banks shrink balance sheets and cut lending.

Each of these is creating opportunities for us to increase our social and economic value.

The ‘Triangle of austerity‘ [Fiscal austerity (Protection gap); Regulatory austerity (Savings gap); Banking austerity (Funding gap)] (graphic)

Read a textual description of the above chart

  • Fiscal austerity – the UK Government has debt of over £1tn, and an unsustainable deficit of £120bn – and falling government spending on welfare means that more individuals will need to make greater use of protection. Greater longevity and an ageing population requires greater pension saving through auto enrolment and more flexibility in decumulation mechanisms including annuities.
  • Regulatory austerity and de-risking, including for pension funds in the UK and internationally, will enable us to extend our established £64bn business delivering liability-driven investment, and other retirement solutions including longevity insurance, and pension buyouts.
  • Funding austerity and shrinking bank balance sheets create new long-term investment opportunities, for example in infrastructure and housing, for insurers including Legal & General. We have already invested over £1.2bn in these sectors in the UK.

All of these provide opportunities for us to do business better and more inclusively within the markets in which we operate around the world.

The key drivers of growth are bigger macro trends, which are likely to be with us for some considerable time. These are important thematic issues, which run across economic cycles.

There are five of these macro-themes, and we have a commercial response to each of them.

Homogenous asset markets

LGIM International

Ageing populations

Retirement Solutions

‘On the Go’ lifestyles

Digital Solutions

Welfare Reforms

Protection

Retrenching banks

Direct investments

  • As global asset markets become more homogenous, LGIM will accelerate its expansion in international markets.
  • Ageing populations require greater individual pension saving and self-reliance. People and governments can’t rely on the next generation to fund them any more. The era of the Defined Benefit (also known as Final Salary) pension is over and we are well placed to handle its legacy and its transition. Our focus on Retirement Solutions for individuals and companies therefore taps directly into the changing demographic.
  • The global economy is fast turning digital, with huge implications for how we interact with customers and consumers, and how we change our processes for maximum efficiency.
  • State spending is falling, again not just in the UK. Tax and spend on welfare is slowly being replaced by individual self-funding and premium-based systems. This will drive growth in individual protection, long-term care, and group income protection. These UK examples are just the beginning of a new approach to public-private risk sharing, and we are well placed to be a central player in these markets.
  • Banks are likely to shrink or rebuild their balance sheets. This creates opportunities for direct investment. We are already active in property and infrastructure.
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