Cheers: Oxford University has a £4billion partnership with Legal & General
Oxford University is almost a thousand years old, tracing its origins to 1096. Next year, when the Life and Mind Building opens on campus, it will be the biggest construction project ever undertaken by the university and its largest teaching and research facility.
The building, set to turbocharge Oxford’s science capabilities is funded by Legal & General as part of a £4billion partnership with the university, involving new homes for staff and students and upgraded facilities across the city.
Legal & General has long been considered rather boring, a UK insurance business whose for tunes wax and wane 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 the assets in that pension division are international.
The group has a growing business in America and an arm dedicated to ‘alternative’ assets, including the Oxford joint venture as well as retirement villages, clean energy, data centres, urban regeneration and affordable housing.
The company’s shares are £2.55 and should move higher as it profits from changes in the pensions market and chief executive Nigel Wilson pushes on with a robust, five-year growth plan. Shareholders also benefit from generous dividend payments, with 19.4p forecast for the year just ended, putting the stock on a yield of more than 7.5 per cent.
L&G is expected to deliver operating profits of around £2.8billion for 2022, almost 70 per cent of which will come from its pension business. Within that, the group is likely to generate about £600million from managing pensions, life assurance 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 almost £2.5trillion of 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 were set up in past decades and the promises made to staff need to be kept.
The picture is similar in America and numerous companies, here and there, have concluded that managing large pension schemes is complex, time-consuming and best handled by experts, such as L&G. Over the years, the group has established a reputation in this field, taking over hundreds of schemes with combined pension liabilities of almost £80billion.
Now brokers expect a step-change in activity, with increasing numbers of firms handing over their defined benefit schemes to L&G.
The market is complex. Highly trained actuaries have to work out how long people are likely to live and how much money firms will need to invest now to be able to pay out pensions down the line. Bonds are considered the safest investments for these schemes but, when interest rates are low, returns are minimal. That means businesses either have to put in more cash to fund their schemes or run into deficit.
Numerous companies have gone down the deficit route in recent years, as interest rates have been at record lows. Now the tide is turning, driving up bond returns and helping schemes to become stronger.
This presents L&G with a big opportunity. Many firms are desperate to hand over their pension schemes to big operators but sales have been held back because the group will not take on schemes with big deficits. Now that the situation is changing, activity is forecast to pick up at pace, with experts predicting that sales of defined benefit schemes will increase more than 30 per cent over the next four years. L&G is ideally placed to benefit and similar trends are predicted in the US.
Firms are also increasingly minded to offload their pensions liabilities following the defined benefit debacle last Autumn, when schemes faced collapse after Liz Truss and Kwasi Kwarteng’s ill-fated mini-Budget.
Brokers expect this turn in the pension market to deliver a step-up in L&G’s results, with profits soaring from £2.8 billion to £3.8 billion between now and 2026. Dividends should rise in sync, with 20.3p pencilled in for the current year, rising to 23.6p in four years’ time.
But L&G is not just about pensions. The company has a thriving business managing money for big institutions and individual savers.
Wilson is justly proud of his group’s investment in a wide range of assets, designed to combat climate change, increase the supply of affordable housing, improve inner cities and promote advances in science and healthcare.
Initiatives include investing in the regeneration of Sheffield; helping to fund a science and technology hub in Newcastle; delivering a net zero retirement village in Bedfordshire and building reasonably-priced homes across the country.
Midas verdict: Legal & General traces its roots back to 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 assurance to the public and Legal & General was born. The company retains vestiges of that past to this day but, valued on the stock exchange at more than £15billion, it has grown beyond its founders’ wildest dreams. There is plenty more growth to come and the shares, at £2.55, should deliver long-term rewards, supplemented by generous dividends.
Traded on: Main Market Ticker: LGEN Contact: group.legalandgeneral.com or 0370 707 1399
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