LGIM Annual Report by to the point

POOLED PENSION FUNDS ANNUAL REPORT 2007

CONTENTS 01 Chairman’s report 04 Managing Director’s report 06 Market background 12 Index highlights 14 Active Fixed Income highlights 17 Derivative Structuring highlights’ 18 Active Equities highlights 20 Property highlights 21 Corporate Governance 24 How LGIM manages risk 25 How LGIM can help clients manage risk 26 Living with regulation 27 Helping clients live with regulation 28 Managing scheme governance 29 DC Scheme fund choices 30 Performance

Note: the Funds described in this Annual Report are selections of a unit linked life insurance policy only available to pension schemes.

07 HIGHLIGHTS Legal & General Investment Management has seen unbroken FUM growth over the past 10 years. We believe that this growth is driven by delivering excellent performance, outstanding client service and measured innovation for our clients.

Total new business (ÂŁ billion)

11 00

297 Total funds under management (ÂŁ billion)

233 204 163 104

111

113

114

135

LGIM Pooled Pension Funds Annual Report 2007

CHAIRMANâ&#x20AC;&#x2122;S REPORT

A TIME FOR 2007 was a landmark year in the history of investment markets and for Legal & General Investment Management. From the early summer onwards, the near paralysis of the banking systems in both the UK and the USA led to a rout in credit markets.

LGIM Pooled Pension Funds Annual Report 2007

Peter Chambers Chairman Corporate Pensions

REFLECTION The problems in credit were first and most evident in the US sub-prime mortgage arena, by the end of the year western banks had seen their capital bases decimated, the contagion of credit uncertainty had spread through all credit markets, even AAA, and we were seeing significant restrictions to lending across the economy. Against this background our core business at PMC remained sound. We offer our clients low risk, value for money, pooled solutions which proved very effective indeed in 2007. We now have a 20 year uninterrupted history of growth which is an extremely rare occurrence in our industry and is something that both we and our clients are proud of. In 2007 we expanded our fund ranges, most notably in the realm of liability driven investment where we have become established as a leading participant. We also expanded our range of index

funds into new arenas, reflecting the changing requirements of our clients. PMC gained an extremely high level of new business in 2007, almost twice the level that we had achieved in 2006. On top of this we also absorbed around ÂŁ20 billion of mandates from former clients of Hermes Asset Management after Hermes had decided to withdraw from the indexed market. In total we gained 260 new clients in 2007, as well as receiving additional investments from over 2,100 existing clients, a testimony to the quality of service we provide. We also developed our fixed income capability in 2007, which we believe will gain further recognition this year, having outperformed in both up and down in recent years. The performance of active equity funds was mixed with the UK and Asia Pacific funds providing the most consistent outperformance.

It is always a highlight to win awards and in 2007 it was particularly pleasing to receive a series of awards relating to the strength of our client service, including Client Service Team of the Year, Best Client Administration and Best Consultant Relations by Financial News and the 10 Years of Investment Excellence award by Professional Pensions magazine. I would like to thank our employees and our clients for their strong support in 2007 and together we can look forward to 2008 with confidence.

Peter Chambers Chairman Corporate Pensions

LGIM Pooled Pension Funds Annual Report 2007

MANAGING DIRECTOR’S REPORT

IT’S ALL PART OF I am delighted to report that 2007 was another successful year for PMC with record levels of new business (£52bn) invested by both existing and new clients. I believe this success owes much to our continued commitment to delivering effective product solutions and market leading customer service.

LGIM Pooled Pension Funds Annual Report 2007

Mike Craston Mangling Director Corporate Pensions

OUR SERVICE 1

During 2007, responding to demand from clients, PMC introduced a range of new products to the market. This included:

• a range of specialist sector equity index funds allowing investment in quoted infrastructure, private equity and real estate,

• extending the number of funds originally developed for DB pension schemes to DC plans, 3

1 John Bridges Client Account Manager Team Head 2 Sharon Niebergall Client Account Manager Team Head 3 Ian Richards Head of DC Strategy and Governance 4 Craig Brown Head of Business Development

• a significantly extended range of pooled LDI funds. LDI Solutions in particular evolved substantially in 2007 with the development of a suite of simple, transparent, low cost pooled funds that allow our clients on a passive or active basis to extend the duration of their fixed income portfolios or closely match scheme assets to liabilities. Supporting this extended product range our derivative structuring team has grown substantially and now includes 12 professionals making it one of the largest and most experienced teams enabling us to deliver effective solutions to our clients and their consultants.

Delivering high quality service to our customer base remains at the very heart of our overall business strategy and we were, therefore, delighted to see this service quality acknowledged through industry awards in 2007. During 2007 we delivered a number of additional initiatives designed to enhance this service proposition. To directly support pension scheme trustee education we provided 17 training sessions covering a wide variety of investment themes around the UK. These sessions were attended by over 800 people and feedback has been so positive that we will be expanding this programme in 2008. A key operational development in 2007, to help maintain our service lead, was the launch of LGIM’s straight through processing initiative. This allows investment instructions to be sent automatically by a third party administrator’s systems into our systems, and provide confirmations back without human intervention. When linked with administrators; payroll departments and members, this can significantly reduce the dealing cycle.

As you may already be aware, during the year Legal & General relocated the whole of its offices from Bucklersbury House to Coleman Street. That move, which was designed to give LGIM the capacity for further growth, was achieved with no disruption to clients. Looking into 2008, you can be assured that we are not complacent, we realise that we need to strive to deliver best in class service to you. I would like to take this opportunity to thank you for your continued support.

Mike Craston Managing Director Corporate Pensions

LGIM Pooled Pension Funds Annual Report 2007

MARKET BACKGROUND

REFLECTING ON AN David North Head of Asset Allocation

2007 was a mixed year for equity markets, but a strong year for oil. Dollar weakness reduced returns to sterling investors. The global economy registered another year of strong, above trend growth in 2007, despite the sharp slowdown in the US housing market. The big theme in the global economy was decoupling.

Equity indices also reflected these developments. China, India and Brazil saw returns of 61%, 75% and 76% respectively. This contrasted with much more modest returns from the US, Japan and the UK of -3.4%, -11.0% and 3.8% respectively, excluding dividends.

As the sectors exposed to housing in the US slowed, the emerging economies of China, India, Brazil, Russia and the Middle East all boomed. This had profound knock on effects across the developed world. US exports boomed, largely offsetting the negative effect of weaker housing on GDP. Economies with a strong export sector â&#x20AC;&#x201C; such as Germany â&#x20AC;&#x201C; performed exceptionally well.

There were also marked differences between indices in the same markets. Most striking was the underperformance of SmallCap stocks, after the profound outperformance from 2000 to 2006. In 2007, the FTSE 250 index fell -4.7%, versus the 3.8% rise in the FTSE. SmallCap stocks also underperformed in Japan, the US, Hong Kong and Europe.

Markets reflected this change of economic leadership. The US tradeweighted dollar index weakened by 10% over the year, which diminished US equity returns for UK investors.

Behind the big global decoupling theme, there was a more intriguing development. The co-existence of deflation and inflation in the global economy.

LGIM Pooled Pension Funds Annual Report 2007

The big deflationary force was the breakdown of the structured finance model of global banking. Over the past five years in particular, banks globally reinvented themselves. They moved away from the traditional model of borrowing short (taking deposits) and lending long (making business loans), towards origination (making a loan and packaging it up) and distribution (offering credit to hedge funds and special investment vehicles to buy the packaged loans).

TERESTING YEAR This year, the new business model came under stress. The rapid increase in defaults in US subprime loans led to a deterioration in the quality of the assets backed by those loans. That led to a liquidity squeeze and periodic dislocations in the markets for these securities â&#x20AC;&#x201C; in particular in August, and again in November. It also led to a sharp underperformance of financial companies during the year. At the same time, we saw the emergence of inflationary pressure.

This was most noticeable in wages in India, China and Eastern Europe, as well as in the price of food and fuel. Crude oil prices rose 58% during the year. The Federal Reserve reacted to the problems in structured finance by cutting the Fed funds rate by 1% from the end of August. However, this was insufficient to prevent market worries that the blend of deflating bank assets and inflating food and fuel prices was not particularly benign for equity markets.

UK total returns 2007 5.3%

5.3% 4.4% 3.5%

FTSE All-Share Index

FTSE A Government (All Stocks) Index

FTSE World (ex-UK) Index

IPD Monthly Property Index

LGIM Pooled Pension Funds Annual Report 2007

MARKET BACKGROUND CONTINUED UK EQUITIES FTSE AllShare struggled in 2007 SmallCap stocks and financials underperform

property. Real estate companies also fared particularly badly. The shares of British Land, the largest company in the sector, halved during the year.

The net effect was a rather flat performance for the FTSE AllShare, down 2% for the year, excluding dividends.

Title to be inserted? 120 115 110

2007 was a year of divergent trends for the UK economy and for UK markets. The economy started the year in robust fashion, supported by powerful growth in the export sector and in the financial sector in the first half of the year. Growth was so robust that the Monetary Policy Committee (MPC) of the Bank of England raised rates by 0.75% in the first half of the year. The MPC felt that it needed to slow the domestic economy in order to offset the strength from overseas, and thereby to mitigate inflationary pressure. The rise in interest rates had an almost immediate impact on the performance of financials. The performance of companies within the UK market mirrored the key global trends described in the last section. From late January financial companies underperformed the broader market – in part due to their very heavy reliance on property. The average UK facing bank has around 70% of its loans exposed to

The pressure on financial companies reached a denouement in mid-August, as Britain witnessed its first bank run in 140 years. The unfortunate recipient of this activity was Northern Rock, whose shares lost over 90% of their value during the year.

In 2008 we expect markets to remain volatile in the short term with increased evidence of slowing consumer spending and difficult credit markets impacting on corporate profits.

105 100 95 90 85 80

Another victim of the collapse was the mergers and acquisitions boom. In the first half of the year, mergers and acquisitions – and in particular private equity buyouts – increased at a pace not seen since the late 1980s. Small capitalisation companies were the particular beneficiaries of this. Not only did the SmallCaps receive a bid-premium over this period, but they also geared-up – which helped their re-rating against larger capitalisation companies. That came to an abrupt end in July as more difficult financing terms disrupted the private equity model. The FTSE 250 fell -4.7% during the year compared to a 3.8% rise for the FTSE 100.

LGIM Pooled Pension Funds Annual Report 2007

FTSE 100

FTSE MidCap

FTSE All-Share

FTSE SmallCap

But all was not doom and gloom. The powerful growth in the emerging markets, combined with significant production constraints supported an excellent performance by the resource companies. Top of the crop was Rio Tinto, which rose 95% over the year, buoyed not only by resource prices but by a hostile bid from the bidder, BHPBilliton who also rose 65% during the year, after a flat performance in 2006 and British Gas jumped 65%, aided by major new discoveries.

European Equities total returns 2007 120

115

110

105

100

95 J

FTSE World North America Index – local return

FTSE World Europe Index – local return

FTSE World North America Index – sterling return

FTSE World Europe Index – sterling return

NORTH AMERICAN EQUITIES Interest rates cut 100 basis points from August Equity market just ahead for the year The US did not diverge from the global theme of poor financials and real estate, underperforming SmallCaps and outperforming resources. For the year as a whole, these themes broadly cancelled each other out, leaving the S&P 500 down 3.5% for the year, excluding dividends. The US housebuilders led the charge downwards, losing 60% of their value over the course of the year, as the full scale of deterioration in the subprime mortgage market became manifest. Next in line were the non-bank financials involved in sub-prime, many of which declared bankruptcy during the year. Credit insurers, such as AMBAC, also fell precipitously, while the broader US banks index lost 33% of its value.The Russell 2000 index of SmallCaps underperformed the LargeCap S&P, falling 2.7% during the year.

Resources performed much better, reflecting strong global demand and constrained supply. The S&P 500 Energy Index surged 32% during the year, while the basic materials index rose by 20%. One particular standout in the US market was the outperformance of Large-Cap, consumer technology stocks. Google, Apple, Research in Motion and Amazon all put in sterling performances, rising by 50%, 134%, 166% and 134% respectively. The outlook for the equity market remains challenging. Profits estimates for 2008 are likely to be reduced, as write downs from the financial sector continue and the more restricted availability of credit and ongoing correction in the housing market dampen the growth outlook. Equity valuations remain supportive however and corporations continue to buy back stock. These factors should continue to provide downside support, as the excesses of the housing boom continue to unwind.

EUROPEAN EQUITIES A flat performance for European markets The European equity market ended the year almost exactly where it started. But that apparently placid performance concealed much turbulence at the country and sector levels. On the country levels there was a profound divergence between the peripheral ‘convergence’ economies such as Ireland, the Scandinavians such as Sweden and the export powerhouse of Germany. Ireland suffered profoundly, as the local property market lurched downwards, and as the banks saw a deterioration in their asset quality. The Irish market fell -17.2% for the year. The Swedish market also suffered from rising rates, and the disappearance of the private equity bid, fell by -1.4%. But the German market showed contrasting fortunes. The DAX ended the year within 3% of its all time high, up 22% excluding dividends.

At the sector level, the same global themes of financial and property underperformance, resource and industrials outperformance played through the market. Banks fell 17%. Basic resources rose 28%. We believe that the pace of domestic economic growth will slow across Europe, in the face of poor US demand and monetary tightness. The latter of these is expected to continue in response to latent inflationary pressures, but economies will benefit to some extent from good demand from Asia and Eastern Europe.

2007

North American Equities total returns 2007 120

LGIM Pooled Pension Funds Annual Report 2007

MARKET BACKGROUND CONTINUED Japanese Equities total returns 2007

Asia Pacific Equities total returns 2007

110

150 140

105

130 100 120 95 110 90

100 90 J

FTSE World Japan Index – local return

FTSE World Asia Pacific (ex-Japan) Index – local return

FTSE World Japan Index – sterling return

FTSE World Asia Pacific (ex-Japan) Index – sterling return

JAPANESE EQUITIES Poor returns for Japan The Nikkei 225 Index lost -11% in 2007, the weakest of the major regions in 2007. The Japanese Central Bank surprised global investors and raised its benchmark interest rate by 0.25% to 0.5% in February 2007. With no apparent inflation, the central bank kept interest rates unchanged afterward.

One of the best performing stocks in the Topix this year was Nintendo up over 100% as the world tries to snap up as many Wii consoles as it can get its hands on. At current valuations Japanese equities are very attractive versus other global markets.

Yasuo Fakuda, voted new leader of the Liberal Democratic Party, is set to become Japan’s new Prime Minister after Sinzo Abe’s abrupt resignation. Earnings were hit hard in Japan in the second half of the year as problems in the US sub prime spilled over to affect Japanese company balance sheets. And in July along with the markets falling the Carry Trade, borrowing in a low yielding currency to invest in a higher yielding currency, unwound as investors pared back risk.

LGIM Pooled Pension Funds Annual Report 2007

ASIA PACIFIC (EX-JAPAN) EQUITIES A year of outperformance The bull market completed its fifth year in Asia as markets were unhindered by high oil prices, weak US economic data and the subprime market. Rising inflation took a hold in 2007, as Chinese CPI rose 6.9% from 2.2% year on year in January. With the exception of Australia, China and Taiwan, most central banks cut interest rates. Despite sharp sell offs in quarter one 2007 and November, emerging markets in Asia delivered stunning returns over the course of the year. India and China were among the most impressive, rising 75% and 61% respectively. South East Asia was also very strong, with improving macro fundamentals driving returns of 53% for Indonesia and more than 35% for Thailand, Malaysia and the Philippines.

PetroChina became the largest stock in the world by market capitalisation as it posted an IPO in the A shares market. The FTSE All-World Asia Pacific ex Japan Index increased 37% beating the FTSE All-World Index by 26%. In the short-term investors’ concerns about the impact of a deeper downturn in the US economy, the prospect of downgrades to Chinese growth, due to the weather and infrastructure constraints, combined with the potential inflationary impact of high energy and food prices may continue to constrain markets.

Bonds total returns 2007

UK Property yields & returns 2007

110 108

Sector

106 104

Equivalent yield % Dec 06 Dec 07 % %

Total return % Dec 06 Dec 07 % %

Retail

5.0

5.7

15.2

-7.1

Office

5.5

6.3

23.1

-1.4

Industrial

6.2

6.9

17.7

-3.9

Overall

5.4

6.1

17.9

-4.4

102 100 98 96 94

Source: IPD Quarterly Index

92 90

FTSE A Government (Over 15 Year) Index

FTSE A Government Index-Linked (Over 5 Year) Index

JPM Global (ex-UK) Traded Bond Index

iBoxx GBP Non-Gilt 10 Year+ Index

BONDS A year of two halves Sterling denominated bonds experienced divergent performances in the first and second half of 2007, reflecting a combination of local and global trends. Gilt markets sold off during the first half of 2007, as the UK economy grew above potential, aided by powerful growth in both the financial services and export sectors. The global environment also reinforced the selloff as European growth accelerated, and emerging market such as the Middle East and China continued to boom. The UK 10 Year Gilt yield rose from 4.75% at the start of the year, to 5.5% by mid-year. But at that point, the trend reversed. The global credit crunch infected the UK, culminating in a run on Northern Rock during August. This, combined with a sharp deterioration in the interbank market. A fourth quarter slowdown in US growth and the threat

of a slowdown elsewhere, led to a flight to quality in the UK bond markets. This saw UK 10 year Gilt yields fall back from 5.5% mid-year to 4.4% by the end of the year, a yield almost identical to that at the start of 2007. Looking ahead, unless one is very bearish on prospects for the economy it is hard to see value in gilts in the face of a deteriorating inflation picture. In particular, the shape of the yield curve offers no reward for taking duration risk. The story seems even more the case for index-linked gilts, which have been bid up to levels that anticipate the MPC not keeping inside its target range for inflation. The yield advantage offered by investment grade bonds relative to gilts in 2007 was greater than had been the case for years and they can be expected to outperform both cash and gilts in 2008 Conventional and inflation linked overseas bonds, particularly longer dated ones, also offer value for money relative to domestic government bonds.

PROPERTY Property overvalued 2007 was a year of two halves with the first six months characterised by slowing yield but moderate improvement in rental growth, led by London offices. Then from the middle of the year there was a change in sentiment, as the 10 Year Gilt yield increased and credit restrictions took hold. Investors began to appreciate that property yields had reached levels where property could no longer be considered to offer fair value.

We expect the process of re-pricing to continue into 2008, although we believe market yields will begin to stabilise by the middle of the year. While the correction in yields will undoubtedly have a negative impact on total returns over the first half of the year, the readjustment in pricing and short term uncertainty in the market should lead to a greater ability to exploit mispricing opportunities, enabling managers to add value and raise portfolio returns above that delivered by the market alone.

As a result, the risk premium for property versus other asset classes needed to be re-priced and subsequently we have seen reductions in capital value of about 6% from the peak in July. This makes the fourth quarter total return for all property reported by the IPD the worst since records began in 1987.

LGIM Pooled Pension Funds Annual Report 2007

INDEX HIGHLIGHTS

INDEX FUNDS TRACK For the UK market 2007 was notable for the distinct difference in performance between industry sectors. There was for example significant strength in mining stocks over the year offset unfortunately in the second half by weakness in banking stocks as a result of credit concerns emanating from the US. By the end of the year the level of the market showed little overall change.

EQUITIES Activity in the UK continued with over 40 companies being removed from the FTSE All-Share Index following take overs, a similar level to the previous year. In the first half, Corus was acquired by Tata Steel of India, Gallaher by Japan Tobacco and Scottish Power by Iberdrola of Spain. In the second half, Alliance Boots and EMI were taken over by private equity investors, Hanson by Heidelberger of Germany, and Imperial Chemical Industries by Akzo Nobel of Holland. There were no major new entrants, with Sports Direct, New Star Asset Management and GEM Diamonds featuring amongst the largest.

UK companies maintained a high level of returning cash to shareholders through special dividends, with over ÂŁ8 billion being returned, including ÂŁ2.1 billion from Smiths group. Following unsuccessful take over approaches and stake building, the free-float weighting of the London Stock Exchange was reduced from 100% to 75%. Invesco moved its share listing to the US and was duly removed from the UK index series. The main changes to the FTSE World North America Index resulted from merger and acquisition (M&A) activity and share buy-backs. BellSouth was deleted from the index following its $86bn takeover by AT&T, the largest

LGIM Pooled Pension Funds Annual Report 2007

Barry Holman Managing Director Index Funds

ever acquisition in the telephone industry. Other notable take overs included Caremark (acquired by CVS) and Phelps Dodge (acquired by Freeport-McMoran), Alltel Corp and TXU Corp were acquired for cash by non-index companies and Alcan was acquired by UK mining company Rio Tinto. A number of multinational companies reduced their weight in the index following continued share buy-back programmes, these include IBM, Exxon Mobil and Microsoft.

SUCCESSFULLY AGAIN M&A activity continued in the FTSE World Europe region where the merger of Italian banks Banco Lombarda and Banche Popolari Unite resulted in the formation of new company Unione Di Banche Italiene. Spanish electricity supplier Endesa was acquired by Italian company Enel and Dutch bank ABN Amro was taken over by a consortium headed by Royal Bank of Scotland. In Spain, Banco Bilbao increased its weight following the takeover of Compass Bancshares, whilst in France Unibail secured almost 80% of the shares in Rodamco Europe (Netherlands) to form Europeâ&#x20AC;&#x2122;s largest real estate investment trust. Immoeast (Austria) raised nearly ÂŁ2bn through a rights issue. In Japan, Nikko Cordial reduced its weight following the acquisition of 61% of the company by Citigroup. Daimaru increased its weight following its merger with non constituent Matsuzakaya and changed its name to J Front Retailing. Within the Asia-Pacific (ex Japan) region, Australian company Suncorp Metway merged with Promina for a combination of stock and cash. Taiwan Semiconductor increased its weight following the sale of American Depository shares by Philips Electronics. Rinker Group was purchased by

Mexican cement producer, Cemex SAB de CV, for USD 14.2bn. Australian retailer Coles Group was purchased by Wesfarmers in a cash and stock deal.

the market capitalisation of the Barclays World Government inflation index grew by over 22% in 2007 to reach $1.25 trillion.

BONDS

ASSET ALLOCATION

The composition of the FTSE A Government (All Stocks) Index was affected by 19 auctions of conventional fixed interest gilts during the year. These auctions included the issue of three new gilts: a five year Treasury 5.25% 2012, a 10 year Treasury 5% 2018 and a 35 year Treasury 4.5% 2042. The Treasury 4.5% 2007, Treasury 8.5% 2007 and Treasury 7.25% 2007 issues all matured during the year.

For client specific benchmarks, the gradual reduction in equities in favour of other asset classes has continued. The benchmark changes have been implemented immediately or through the application of cash flows, or by using either time-dependent or performance-dependent criteria to trigger switches between asset classes. This trend seems likely to continue.

The FTSE A Index-Linked (All Stocks) Index experienced 15 auctions of inflation-linked gilts during the year. These auctions included three new issues: Treasury 1.125% 2037, Treasury 1.875% 2022 and Treasury 0.75% 2047.

The asset allocation for the peer group benchmark funds has been kept close to that of the average UK pension fund, as reflected by the BNY Mellon CAPS Pooled Pension Fund Update. These updates have also confirmed the trend of gradual switching out of equities for discretionary mandates.

1 Ali Toutounchi Deputy Managing Director

2 Neil Higgins Director 3 Julian Harding Director 4 Ian Lymath Associate Director 5 Katrina McMillan Associate Director

The capitalisation of the overseas bond markets increased significantly during the year. The Citigroup World Government Bond Index for example grew by over 13% to $11.1 trillion in 2007. Issuance at the ultra long end continued to feature with a total of 10 new bonds from eight countries with maturity dates of between 2037 and 2040. Within the inflation-linked sector, LGIM Pooled Pension Funds Annual Report 2007

ACTIVE FIXED INCOME HIGHLIGHTS

A YEAR OF CHANGE FOR There was a high level of disparity between the performance of UK corporate and government bonds during the first half and second half of 2007, reflecting changes in the economy both locally and globally. Corporate bonds generally underperformed government bonds as the gap between corporate bond yields and government bond yields widened. Index-Linked gilts out-performed corporate bonds and conventional gilts as investors sought protection from rising inflation. GOVERNMENT BONDS Over the course of the year, the most notable feature of the UK government bond market was the change in shape of the yield curve. At the beginning of the year, long-dated gilt yields had reached historic lows, and were yielding far less than shorter-dated equivalents. This situation flies in the face of economic logic as, all else being equal, investors will require a higher return to provide funds for a longer period of time than a shorter one. The apparent anomaly was caused by exceptionally high demand for so-called â&#x20AC;&#x2DC;liability driven investmentâ&#x20AC;&#x2122;, where investors with long-term liabilities, such as pension funds, seek assets with a similar maturity profile. Over the course of the year however, while liability-driven demand

remained high, economic conditions began to deteriorate while inflation threats remained. The impact of this change in the macro economic environment was to lead to a pronounced shift in the shape of the UK government yield curve.

fell in the second half of the year as investors sought greater security in response to concerns that rippled out from troubles in the US subprime mortgages market and yields ended the year broadly unchanged from the beginning of the year position.

Shorter-dated bond yields began to fall as investors priced in increasing expectations of lower interest rates. By the end of the year, the Bank of England had delivered the first in what may prove to be a series of cuts in Base Rate. Longer-dated bond yields rose, with corresponding falls in price in the first half of the year, as investors began increasingly to fear higher inflation in future. Longer-dated bonds are more sensitive to increases in the inflation rate. However, yields

FUND ACTIVITY AND PERFORMANCE

LGIM Pooled Pension Funds Annual Report 2007

1 David North Director

3 Robert Barnard-Smith Associate Director

2 Jonathan Cloke Director

4 Georg Grodzki Head of Credit Research

The funds began the year with an underweight position in the longestdated government bonds, which proved beneficial as long-dated bond yields rose faster than at shorter maturities, with correspondingly greater falls in price. Profits were taken on this position during the year and the position was largely unwound by the year end.

FIXED INCOME Roger Bartley Head of Active Fixed income

In terms of overall interest rate risk, the funds began the year with an overall underweight position, but this was regularly altered throughout the year in order to take advantage of more tactical valuation opportunities. Throughout the year we adopted an overweight position in long-dated overseas government bonds on a currency hedged basis. Whilst our tactical positioning added to the funds performance, the core position moved against us, costing the fund a small amount of performance overall.

INDEX-LINKED BONDS

of inflation protection and high sensitivity to interest rate changes made them particularly sought after by those investors seeking to match long-dated, inflation-linked liabilities with similar assets. Pension funds were the key investor group in that regard. A further aid to the relative outperformance of the indexlinked market was possibly a perceived increase in future inflation, increasing investor concern that the â&#x20AC;&#x2DC;realâ&#x20AC;&#x2122; value of conventional bonds may be more quickly eroded. The relative valuation

Unlike the conventional government bond market, prices for index-linked bonds rose, or at least did not fall, for almost all maturities over the course of the year. Bonds with a maturity of ten years or more were particularly strong.

5 Patrick Vogel Head of European Credit Portfolio 6 Ashley Goldblatt Fixed Income Director

The key reason for this was the high level of demand for index-linked bonds relative to supply. The characteristics LGIM Pooled Pension Funds Annual Report 2007

ACTIVE FIXED INCOME HIGHLIGHTS CONTINUED differentials between conventional and index-linked bonds reached new highs during the year, and are at levels that may prove hard to sustain indefinitely, particularly if the perceived future inflationary threat does not fully materialise.

As valuations fell, some investors were thought more likely to become ‘forced sellers’ in order to shore up balance sheets or return money to clients. This in turn led to further fears regarding valuations, creating the beginning of a vicious circle.

Fund activity and performance Over the course of the year, we have held a proportion of conventional gilts within our index-linked portfolio, reflecting our view that index-linked bonds had become overvalued. This remains our view, but over the course of the year as a whole, index-linked bonds outperformed conventional bonds, and this impacted negatively on performance. We remain confident that valuation differentials between conventional and index-linked bonds are unsustainably wide. We are likely to add to existing positions should further opportunities present themselves.

The effect of this has been to create a loss of confidence in the banking system, which has led to a broad based reluctance to lend, pushing up the cost of corporate and bank borrowing. The full macro economic effects of this are yet to be felt, but it has already led a number of banks to post weaker earnings for the second half of 2007, with the prospect of weak earnings and ongoing reductions in asset valuations in 2008.

As with our conventional bond funds, we adopted an overweight position in overseas Government index-linked bonds within our UK index-linked funds. This position was currency hedged. Although we enjoyed some tactical success, the core position did not move in our favour and, overall, this position resulted in some underperformance of the fund.

CORPORATE BONDS The corporate bond market underperformed its government counterpart during the year, with small positive relative returns in the first part of the year being more than offset by relative underperformance in the wake of the ‘credit crunch’. Fears regarding likely losses that began in the US subprime mortgage market quickly escalated to broader concerns regarding a wide range of debt instruments.

Fund activity and performance We began the year with a small overweight position to lower credit quality bonds, which proved beneficial during the first half of the year as corporate bonds continued to marginally outperform. Heading into the second quarter of the year we began a program of risk reduction, selling some subordinated bank and insurance names where we could see limited further upside. This process was partially complete when the ‘credit crunch’ began in late June, however was continued through the summer by selling financials into either cash or risk free assets. The risk reduction trades we had already executed proved to be beneficial for fund performance as it was in the financial sector where valuations were hardest hit.

OVERSEAS BONDS In interest rate terms, the overarching theme for 2007 was that of steeper yield curves. Relatively speaking, all major

LGIM Pooled Pension Funds Annual Report 2007

central banks became more concerned about the prospects for slower global growth in the short-term, leading shorterdated bonds in general to outperform. At the same time however, investors became more concerned with longterm inflation, as energy and commodity prices remained stubbornly high. Despite some lingering concerns regarding inflation, the latter part of the year was characterised much more by talk of interest rate cuts than rate rises. The US Federal Reserve cut interest rates several times in response to the developing global ‘credit crunch’. By contrast the European Central Bank, typically the most concerned with inflation, chose not to follow the example of the US central bank during the year. Fund activity and performance In terms of portfolio positioning and activity, we had relatively limited exposure to interest rate risk during the year. This view was expressed largely via an underweight position in Japanese Government Bonds. While this position was positive for performance in the first half of the year, hopes of a broad based and strong Japanese economic recovery faded during the second half, seeing government bond yields fall. This was a small negative for performance overall. In terms of other activity, the funds adopted a range of tactical currency positions throughout the year. It was our view that the US dollar was likely to continue to weaken, given growing concerns regarding the ability of the US to fund its significant trade deficit. Accordingly we expressed this view by taking overweight positions in a variety of currencies against the US dollar, which was broadly beneficial for the funds.

STANDARD SOLUTIONS HIGHLIGHTS

FOCUS ON LIABILITY RISK MANAGEMENT Kerrigan Procter Head of Standard Solutions

Many clients wished to explore the mitigation of inflation and interest rate risk inherent in their liabilities in 2007, with significant numbers going on to use PMC’s range of LDI pooled funds for risk reduction.

Our LDI pooled funds are ready made packages of bonds and swaps that can be used as building blocks to match a pension scheme’s liabilities. Our aim over the year was to introduce a wide range of these building blocks to allow accurate and flexible risk reduction in a fast and easy-to-implement manner. By the end of the year we had 66 pooled fund ‘building blocks’ overall, spread across four ranges:

• Better Bonds (Active): 9 fixed and 9 RPI-linked building blocks that allow a combination of liability matching with investment in actively managed sterling investment grade corporate bonds.

• Better Bonds (Passive): 9 fixed and 9 RPI-linked building blocks that allow a combination of liability matching with investment in passively managed sterling investment grade corporate bonds.

• Cashflow Matching Funds: 10 fixed and 10 RPI-linked building blocks to allow precise cashflow matching with underlying assets invested in a fund that targets a floating rate of return (3-month LIBOR).

• Enhanced Matching Funds: 5 fixed and 5 RPI-linked building blocks to enable schemes to achieve enhanced sensitivity to interest rates and inflation. Underlying assets are invested in a fund that targets a floating rate of return (3-month LIBOR).

MARKET DRIVERS Fixed interest rates for swaps rose over the first half of the year and then gradually reduced over the second half to end at a level close to where they started the year. The start of June in

particular saw a sudden increase in rates led by a sell-off in the US bond market. This led to a round of risk reduction as pension schemes looked to lock in funding levels. One of the follow on effects of the June sell-off in rates and schemes hedging nominal yields, was the increase in hedging of inflation-linked liabilities. This pushed up inflation swap levels (the market price for removing inflation risk). Once the inflation market had found this new level it remained in a similar range for the rest of the year, despite falling nominal yields and hence falling real yields.

THE LIQUIDITY CRUNCH As fallout from the asset write-downs in the US sub-prime market continued, banks became less willing to lend to

one another from August onwards. This resulted in a rapid spike up in LIBOR, the market rate for inter-bank lending. Our funds-backed by LIBOR generatingassets continued to generate sufficient running yield to meet 3-month LIBOR. The cautious stance of the LIBOR fund and its high diversification meant that unit prices for this fund did not fall over the period, although credit spread widening globally did have some impact on the market valuation of the underlying floating rate assets. For a short period swap spreads (the difference between interest rates in the swap market and the gilt market) did widen substantially. However, by the end of the year swap spreads had tightened again, particularly at the longer maturities.

LGIM Pooled Pension Funds Annual Report 2007

ACTIVE EQUITIES HIGHLIGHTS

A MIXED YEAR FOR 2007 was a year of contrasts for equity markets with strong performance in the first part of the year being diluted in the second half. Asia-Pacific was the best performing of the major regions generally, with the UK, Europe and North America providing a flat performance and the Japanese market struggling over the year. UK The UK equity markets delivered a positive total return of 5.3% in the year. However, it was very much a year of two halves with a positive 7.6% return in the first half and a negative -2.1% return in last six months. The Fund moderately outperformed the index over the year. The first half of the year was particularly strong for performance. MidCaps were key drivers to performance during this period, highlights being Southern Cross Healthcare, MyTravel, Compass Group and Shanks Group. The fund also benefited from corporate activity with bid approaches for both Hanson and ICI. The second half of the year, and quarter three in particular, was more challenging as the Fund suffered from its overweight exposure to MidCaps and an underweight position in the mining sector which saw a sharp move upwards. The Fund was also hit by stock specific negatives from companies such as Experian and Mecom.

As the year progressed the Fund became more defensively positioned to reflect our increasing caution surrounding the global economy. The fund sold down positions in banks, consumer cyclicals and MidCaps generally and added to more defensive stocks and sectors within utilities, consumer staples and healthcare. These actions helped to stabilise performance towards the end of the year. We expect UK markets to remain volatile in the short term with increased evidence of slowing consumer spending and difficult credit markets impacting on corporate performance. The UK Concentrated Equity Fund will continue to be constructed primarily on a bottom up basis with a small number of holdings focusing on our “best ideas”.

NORTH AMERICA The improved performance this year reflects a significant contribution to returns from four main sectors –

LGIM Pooled Pension Funds Annual Report 2007

financials, oil and gas, healthcare and basic materials. Within financials we adopted a very conservative position in the group prior to the eruption of the housing related sub prime credit problems. Stock selection in the energy sector was very good, with National Oilwell Varco in particular rising sharply. In the raw materials and healthcare sector Praxair, Air Products and Medco Health Solutions outperformed the index significantly. As credit availability became more restricted and lending institutions began to shrink their balance sheets, we increased the defensive nature of the portfolio significantly, adding to beverages,

Mark Burgess Head of Equities

UITY MARKETS pharmaceuticals, and household product companies.

EUROPE (EX UK) During the first half of 2007 the Fund was invested in the Europe (ex-UK) Equity Index Fund, tracking the performance of the FTSE World Europe (ex-UK) Index. The Fund returned to active management in the second half of the year, consisting of a focused portfolio of a significantly smaller number of holdings. Partly as a result the Fund has experienced a higher level of stock specific risk. This was beneficial in August and September, but was a source of weakness in October and November, which led to the underperformance of the Fund against the benchmark. Stocks such as Outotec and Rautarruukki, which had hitherto seen strong performance, were sold down aggressively on the back of profit-taking and expectations of weaker economic growth, in spite of the strength of their order books. Other medium-capitalisation stocks were especially weak, owing to lower liquidity, such that the Fund's exposure to these names had a disproportionately greater effect relative to the benchmark. The Fund remains committed to a smaller number of fundamentally-

driven ideas, but, given the broader economic concerns, has adopted a more defensive approach in recent weeks.

JAPAN 2007 was another difficult year for active managers, which is unusual in Japan. The portfolio focus remained on engineering and machinery companies with global market share in niche products and exporters geared into Asian growth. The Fund remained underweight in export stocks that are heavily dependent on the US economy, given the cloudy outlook. This investment strategy worked well for the first half of the year, but was detrimental to performance during the final quarter when fears of a slowdown in China and profit taking took their toll on some of the Fundâ&#x20AC;&#x2122;s larger overweight bets. One notable success was the overweight holding in Nintendo, which continued to rise throughout the year. Other games software manufacturers that will continue to benefit from the game cycle in 2008, were also added to the portfolio. Following on from 2006, the Small and MidCap markets continued to under perform as investors shied away from riskier assets. As a result the Fund held

very limited and selective exposure to such companies.

Towards the end of the year as the global credit crisis continued to deepen, exposure was further raised to defensive sectors, particularly those where the stronger Yen would not impact earnings. Underweight sector positions in rail companies, and utilities were closed out.

ASIA PACIFIC The Fund has performed strongly against its regional benchmark this year, building on its outperformance over the past 3 and 5 years. Strong stock selection has been the key feature, particularly in Australia, Hong Kong and Korea. Throughout the year the Fund increased its weighting in India and the China tilt within the Hong Kong portfolio. Within Australia, there has been a bias towards resources given the positive implications for commodity prices, both hard and soft, from emerging marketsâ&#x20AC;&#x2122; demand. Taiwan, and in the final quarter Korea, have been a source of funds given growing global growth concerns. The Fund enters 2008 with overweight positions in Australian resources, Hong Kong, Singapore and Thailand.

1 Robert Churchlow Head of UK Equities 2 Ian King Head of European Equities 3 Nigel Holland Head of US Equities 4 David Riddle Head of Pacific Basin Equities

LGIM Pooled Pension Funds Annual Report 2007

PROPERTY HIGHLIGHTS

VALUE RETURNS TO UK PROPERTY Charles Walker Fund Manager, Property

The exceptional total returns delivered by the UK property market over recent years peaked in the first half of 2007, with a step change in sentiment at the mid year point.

The catalyst of rising 10 year gilt yields together with restrictions in the credit markets, coincided with a wide acknowledgement that property pricing was no longer at fair value. A significant correction in property values took place over the final six months of the year with capital values falling by almost 10.1% and 12.3%. According to the Russell Mellon CAPS Pooled Pension Fund Survey (offer to offer), the median return for the asset class during 2007 was a negative -6.4%. This was driven by rising yields of approximately 1%. In contrast, rents continued to rise in all occupational markets â&#x20AC;&#x201C; particularly offices in Central London.

LGIM Pooled Pension Funds Annual Report 2007

We consider fair value will re-emerge during 2008 with total returns, following a period of further correction in the first half of 2008, reverting to long term trends of 6-8%pa in the medium term. Against a backdrop of short term volatility in capital values, the Fund outperformed its benchmark by 1% in 2007, delivering top quartile returns over three and five years at 10.1% and 12.3% respectively. Earlier in the year the Fund had been successful in selling a number of assets which were considered to be less defensive in nature. The Fund invested the proceeds in dominant assets let to financially strong tenants on long leases. This strategy to increase the resilience of the portfolio continues its move towards a greater focus on income return, which will form a larger proportion of total return over the coming years.

The Fund continued to concentrate on enhancing the returns through actively managing each asset to maximise performance. A number of value added transactions were completed during the year across all sectors â&#x20AC;&#x201C; notably in Cambridge (industrial), London (offices, retail and industrial holdings), Hereford (retail) and Newbury (industrial). The Fund will continue to deliver its pipeline of active management, whilst shifting its sector focus towards retail markets during 2008. The Fund attracted new investors throughout 2007. It has built a cash reserve of close to 14% over the last six months of the year in order to take advantage of potentially attractive asset pricing as the market reaches its new equilibrium.

CORPORATE GOVERNANCE

INTEGRAL TO OUR INVESTMENT PROCESS LGIM is a major investor in UK companies and with new clients it now represents around 5% of the share capital of the FTSE constituents. LGIM’s activity in all facets of corporate governance is integral to our investment process. OUR APPROACH We apply all the principles set out in the Institutional Shareholders’ Committee’s (ISC) “Responsibilities of Institutional Shareholders and Agents – Statement of Principles” which was updated in September 2005. Specifically, we focus on the effectiveness of a company’s board of management and its remuneration policy, business strategy and business practices, taking into account social, ethical and environmental business issues. In June 2007 the ISC issued a further framework on voting disclosure. LGIM will seek to comply with the 2007

Andy Banks Head of Corporate Governance

framework by disclosing voting instructions given on behalf of Legal & General Assurance Society Limited, which LGIM considers to be indicative of the voting instructions entered on behalf of other clients, who have delegated voting discretion. In April 2007, we published an article in our monthly publication “Fundamentals” on the role and responsibilities of the Senior Independent Director (SID). LGIM believes that the work of the SID is undervalued and that they should be remunerated for the valuable role they play on a Board.

LGIM Pooled Pension Funds Annual Report 2007

CORPORATE GOVERNANCE CONTINUED

Percentage of shareholder that voted against

Significant shareholder dissent

Chrysalis

Ark Therapeutic

Visilink

LATEST DEVELOPMENTS The Financial Reporting Council completed its review of the Combined Code and proposed two changes:

• to remove the restriction on an individual chairing more than one FTSE 100 company; and

• for listed companies outside the FTSE 350, to allow the company chairman to sit on the audit committee where he or she was considered independent on appointment. The Companies Act 2006 came into force in October 2007. An amendment relating to electronic voting is seen as positive for our industry as it will make the voting process more efficient. However, an amendment relating to corporate representatives (S323) has negative ramifications for the industry. It prevents a corporate representative attending a meeting and voting client funds in different ways. The Association

64%

62% 47%

of British Insurers (ABI) is actively canvassing assurances from companies that they will allow and accept voting instructions from corporate representatives. The Chartered Institute of Secretaries of England & Wales is drafting guidelines on this point. LGIM has voted against any changes to Articles relating to S323 that were not accompanied with an assurance to the ABI. ACTIVITY General Meetings and 247 Extraordinary General Meetings on 8673 resolutions and of these LGIM opposed 145 resolutions at 102 companies and abstained on 28 resolutions at 27 companies. LGIM continued its policy of overseas voting at the 100 largest major North American companies. The voting service of Institutional Shareholders Services (ISS) is used to advise on overseas companies. Voting in Europe will be on an exceptional basis as voting may conflict with the dealing activities of the fund.

LGIM Pooled Pension Funds Annual Report 2007

As part of its regular investment process LGIM met the executive management of 924 UK companies to discuss performance and strategy as well as corporate deals. KEY RESOLUTIONS WHERE LGIM VOTED AGAINST

The above figures are significant because a recent study commissioned by the Financial Reporting Council showed that per resolution a company should expect 2.5-5% of votes cast to oppose the resolution. • Chrysalis Group – compensation payment of £450,000 for loss of office which was in addition to normal contractual entitlements.

• Vislink – remuneration report – remuneration practices did not meet best practice guidelines. LGIM has since been contacted to review proposed changes to remuneration.

• Ark Therapeutics – proposed issue of warrants to one party rather than to all shareholders.

Percentage of shareholders that voted against

Shareholder requisitioned resolutions

Tesco

94%

90%

First Group

SHAREHOLDER RESOLUTIONS There were a few occasions in the year when groups with sufficiently large shareholdings raised resolutions at UK general meetings. Although the resolutions were defeated they do lead to engagement with companies on legitimate issues. In the USA such resolutions are frequently raised as the holding requirement is low.

• Tesco – Requisitioned by War on Want requiring Tesco to guarantee a living wage in factories in Bangladesh. The resolution was defeated by 90% of votes cast.

• FirstGroup - the Service Employees International Union requisitioned a resolution compelling the company to adopt a workplace human rights policy. LGIM believes the company’s policies already cover human rights which they disclose to shareholder in their CSR report. The resolution was defeated by 90% of votes cast.

Vodafone

• Vodafone – A number of resolutions were requisitioned by Efficient Capital Structures relating to the company’s interest in Verizon Wireless and debt structure. LGIM did not believe that the proposals were in the best interest of all shareholders. The resolutions were defeated by approx 94% of votes cast. ENGAGEMENT

• HSBC – LGIM had a meeting with the Chairman to find out how the relationship was progressing with the new Chief Executive and to find out more about the roles and responsibilities of the Deputy Chairman and Senior Independent Non Executive Director. Later in the year we met him to discuss some of the concerns that Knight Vinke, an activist shareholder, had raised about the Company. Although we continue to support the Company, we have made it clear a number of concerns needed to be addressed.

• Cable & Wireless – The Company has improved shareholder value and incentives have crystallised. We were however, unable to support the company’s proposal set out this year to grant its Chairman an incentive package. As the package was directly linked to his re-election LGIM abstained on the resolution. We contacted the company on hearing that one of its key executives was set to receive a large compensation package following his departure from the Board. We were satisfied with the explanation provided.

• Northern Rock – LGIM met with the Chairman of the company to express our concerns with the process, and that a potential false market in the shares had been created. We expressed the view that more constructive information needed to be delivered to the market. Further details on our Corporate Governance procedures and activities can be found on our website at www.lgim.com

LGIM Pooled Pension Funds Annual Report 2007

HOW LGIM MANAGES RISK

MANAGING RISK LGIM’s pension clients have entrusted over £185 billion to be managed in accordance with mandates they have set. Most of this money is invested in index tracking funds, held in various combinations to meet client needs. It is critical, therefore, that LGIM has in place robust risk control processes for both its funds and the way that it manages fund combinations that it has been given. It also has to meet the requirements of its regulator, the Financial Services Authority, and auditors who have been appointed to monitor and provide reports that can be used by clients to satisfy themselves that their money is being managed in a satisfactory and safe manner. In order to achieve this LGIM has developed two distinct risk management systems. The Fund Objectives and Guidelines system (FOG) monitors fund and segregated portfolio mandates on a daily basis. The first stage of the system is to set the ‘permitted/not permitted rules’ for each portfolio that state which type of security and which fund actions are permitted or prohibited for the portfolio. There may be several layers of narrower definitions relating to different security

types. The second stage applies detailed rules governing the portfolio’s exposure to the permitted securities. Daily exception reports identifying breaches and exceptions are automatically produced and are monitored by a FOGs Operations Team, with copies being provided for senior management. In this way we can ensure that monies are being managed by fund managers in accordance with expectations. Management of operational risk is facilitated via the Risk Management System (RMS) which is an online database which supports the operational risk mapping and control processes across LGIM. RMS provides a formalised means by which the business function heads manage the risks, associated with their activities.

LGIM Pooled Pension Funds Annual Report 2007

Appropriate staff are required to confirm that controls have been performed and control objectives met. Failures are also required to be reported with an escalation process that reports those failures and associated actions through a number of layers of senior management all the way to the Board of the Legal & General Group for the most severe. Both of these systems are subject to continuous monitoring and improvement by management in addition to regular reviews by compliance managers and internal audit to ensure that LGIM not only delivers to its clients what it has promised but has also achieved that delivery in an acceptable manner without taking more risk than it has contracted to.

HOW LGIM CAN HELP CLIENTS MANAGE RISK

HELPING CLIENTS MANAGE RISK Perhaps the most difficult investment decision faced by trustees of a final salary scheme is determining the optimum balance between limiting risk and maximising growth in their portfolio. While there are mathematical tools that can be used to help, this is largely a judgement call dependent upon a number of factors. The strength of the employers covenant a particularly important factor. For this reason it is important that trustees focus on their own situation and do not get caught up following market trends on how their portfolio should be structured. The most common way of achieving a balance is firstly to determine how much of the portfolio should be a close match to the schemes liabilities and how much should be devoted to growth. Traditionally the matching portfolio would be invested in fixed interest securities while the growth portfolio would be invested in equities. However, just as much care needs to be taken in the make up of the equity portfolio as

the matching portfolio as introducing too much risk in an effort to maximise growth can easily undermine the risk aversion strategy taken on the matching part of the portfolio. It is for this reason that index-tracking funds that eliminate manager stock selection risk are often used as the core of growth portfolios. It is against this background and in order to assist trustees in achieving an appropriate balance that LGIM has developed a whole range of additional funds with different risk profiles that can be used in various combinations with fixed interest and equity index tracking funds to structure a cost effective tailored solution to meet the needs

of any client. We have also pulled together a team of experienced specialists, including actuaries, who can work with trusteeâ&#x20AC;&#x2122;s advisers to construct appropriate structures. These can range from something very simple where there is minimal need for close monitoring, to the most complex, using sophisticated financial instruments. If you would like more information please contact your Client Account Manager. A fuller description of our risk control procedures and systems can be found in our AAF 01/06 Assurance Report on Internal Controls 2007 which will be available from early April.

1 Nick Hodges UK Sales Manager 2 Marcel Linotte Netherlands RFP Manager 3 Nicola Pearson RFP Manager 4 Russell Smith Consultant Relationship Manager 5 Kerry Drew Consultant Relationship Executive

LGIM Pooled Pension Funds Annual Report 2007

LIVING WITH REGULATION

LIVING WITH REGULATION As a life assurance company, LGIM has always been closely monitored by outside bodies. Prior to the Financial Services Act of 1986 responsibility was mainly with the DTI but since then we have been monitored by bodies each taking slightly different stances.

We have been regulated by the DTI, Securities Investment Board and IMRO. Over the years we have acquired significant experience in learning to live with regulation. The regulation of our business is currently with the Financial Services Authority (FSA). They have responsibilities in supervising us from a capital adequacy and structure of capital. In addition the FSA is responsible for supervising how we conduct our business. The Pensions Regulator does not monitor our business, although we carefully watch what he is doing because of the impact on our clients.

example of how difficult we find it. Our legal system has been developed through primary and secondary legislation and case law. The world of financial services is sufficiently new and fast moving that there is little case law to help guide us through the areas of uncertainty. As a consequence the tendency was to be over compliant rather than risk getting something wrong. Today, encouraged by regulation that is now more principal based, we have learnt that it is always best to build relationships with individuals at the FSA and be more pragmatic in our approach.

One of the difficulties in living with regulation is that Regulators are not always prescriptive in their requirements leaving room for interpretation. In the UK we tend not to be very good at this type of approach. Over zealous interpretation of Health and Safety laws is a classic

LGIMâ&#x20AC;&#x2122;s Compliance Department is most certainly not regarded as an anti-business unit but a positive additional resource, enabling us to put in place practices and processes that help us conduct ourselves to the highest standards.

LGIM Pooled Pension Funds Annual Report 2007

1 Louise Barrie Head of DC Client Service Team

2 Chris Lyons Team Head Deputy 3 Helen Gaukrodger Team Head Deputy 4 Debbie Matthews Team Head Deputy

HELPING CLIENTS LIVE WITH REGULATION 1

1 James Sparshott Client Account Manager

2 Matthew Course Client Account Manager 3 Farrakh Ilyas Client Account Manager

Trustees have always had a duty to ensure that their pension schemes have been run in an efficient and timely manner and to meet the requirements of the law. In recent years, however, regulation has begun to dictate that certain aspects of schemes require greater monitoring and improved processes.

In April 2007 the Pensions Regulator issued a discussion paper titled “The governance of work placed pension schemes “ which further broadened guidance to trustees by suggesting greater monitoring on all aspects of risk is required. The consequence of this is that Trustees now have to decide how much time, effort and level of expertise they have available for these monitoring duties, frequently referred to as their governance budget. They then need to ensure that the way their scheme is managed is not more complex or risky than their budget allows. Using this measure, trustees with a low governance budget should not be using investments that involve a good understanding and close monitoring of sophisticated financial instruments. Such investments should be the preserve of trustees able to spend the time and bare the cost of employing advisers to ensure that risks being taken are within the tolerances acceptable to the scheme.

LGIM has been watching these developments with interest and has recognised that it is no longer sufficient to provide investment vehicles that meet their objectives. They must be accompanied by a level of disclosure that enables trustees to see for themselves the risks being borne. It has also been recognised that trustees now need a range of choices that enable them to meet their budget requirements. Generally speaking LGIM’s index tracking funds can be regarded as low governance funds that deliver consistently what is said ‘on the tin’ at low cost. They do not use sophisticated instruments that need close maintenance and LGIM takes a pro-active stance in keeping trustees and their advisers fully informed of changes that might impact a risk exposure. All that trustees need to worry about is the actual funds that they are using and the risks to their overall investment strategy their funds generate.

4 Stephen Skinner Client Account Manager

5 Emily Stock Client Account Manager

6 Andrew Horan Client Account Manager 7 David Barber Client Account Manager 8 Daniel Blass Client Account Manager

LGIM Pooled Pension Funds Annual Report 2007

MANAGING SCHEME GOVERNANCE 9

9 Mike Walsh Client Account Manager 10 Dipesh Patel Client Account Manager 11 Stephen Castle Client Account Manager

CODE OF PRACTICE

12 Anthony Dhuna Client Account Manager 13 Karen Elliott Client Account Manager

The Pensions Regulator is using Codes of Practice as one of his main methods of regulating pension schemes. Codes of practice have an interesting role to play as they do not have any legal force. To quote the Regulator: The Pensions Regulator is using Codes of Practice as one of his main methods of regulating pension schemes. Codes of practice have an interesting role to play as they do not have any legal force. To quote the Regulator: “Codes of Practice are not statements of the law and there is no penalty for failing to comply with them. It is not necessary for all the provisions of a code of practice to be followed in every circumstance” He goes on to point out that any underlying legal requirement must be met and that failure to comply, however, could be taken into account in a court or tribunal. Trustees therefore have the flexibility to manage their scheme in a proportionate way relative to the risks. LGIM’s stance is to endeavour to help trustees meet their governance requirements in any way that it is able.

Disclosure of information to help trustees monitor the investments that they hold is one of our top priorities. Increasingly we are including more and more information in our quarterly reports to help trustees in this regard. Trustees are also encouraged to ask questions and raise any concerns that they might have with their Account Manager. One of the other tools being used by the Regulator is to encourage trustees to become more knowledgeable. He has set up his own web site where training is readily available on a wide range of topics. LGIM has reviewed the various modules and is now supplementing that training with seminars around the country. These take place throughout the year and cover topics that we feel need a more in depth understanding. Our aim is to cater for trustees of both DB and DC arrangements. Contact your Account Manager for further details.

LGIM Pooled Pension Funds Annual Report 2007

14 Peter Faulkner Client Account Manager 15 James Rodger Client Account Manager 16 Robbie Martin Client Account Manager 17 Mark Wybrow Client Account Manager

DC SCHEMES 1

FUND CHOICES 2

Statistics released by the Pensions Regulator suggest that LGIM currently manages around one third of all UK trust based occupational DC assets. This gives us a good insight into the trends and investment strategies of many schemes of all sizes and from a diverse range of industries.

The highlights of what we currently see are as follows:-

• Statistics released by the Pensions Regulator suggest that LGIM currently manages around one third of all UK trust based occupational DC assets. This gives us a good insight into the trends and investment strategies of many schemes of all sizes and from a diverse range of industries. The highlights of what we currently see are as follows:-

• Using index tracking funds as a default, particularly inside a lifestyle strategy, remains the most common core of many schemes.

• Trustees are reviewing more regularly the actual funds used inside their lifestyle strategy with a trend to reduce the UK proportion in global equity portfolios down

from the classic 70:30 split. 50:50 is now the most common choice for changes that are currently being made. Although we now have several schemes that go below this, the fear is that this introduces too much extra currency risk. A number of schemes have mitigated against this risk by including a proportion of our currency hedged versions of our overseas equity funds in their asset mix.

when they reach retirement, trustees are changing the fixed interest funds used in the latter stages of lifestyle programmes. Over 5 year index linked gilts used to be used extensively but because there is no longer a need to buy an index linked annuity, many trustees have switched into combinations of conventional gilts and corporate bonds.

• A degree of rationalisation of • More and more trustees are designating their default fund choice as the scheme’s own bespoke fund to make it easier for them to change it in the future, both from a member communication and administrative perspective.

• In recognition of the changes made on A-day and the new flexibility available to members

additional fund choices is taking place as trustees recognise that too much choice confuses members. LGIM continues to add funds to its DC fund range to ensure that it can meet the changing requirements of its clients and now offers just under 50 different funds many of which can be blended together to form a bespoke mixed fund of the trustees choosing.

1 Les Wloch Client Account Manager 2 Giles Payne Client Account Manager 3 Annie Brothwell Client Account Manager 4 Rob Mcmahon Client Account Manager 5 James Wheeler Client Account Executive

LGIM Pooled Pension Funds Annual Report 2007

PERFORMANCE TABLES 2007

PERFORMANCE

LGIM Pooled Pension Funds Annual Report 2007

INDEX FUND PERFORMANCE 2007 INDEX EQUITY FUNDS Fund UK EQUITY FUNDS UK Equity Index Fund UK Smaller Companies Index Fund UK FTSE 100 Equity Index Fund UK (World) Equity Index Fund UK Equity (5% Capped) Passive Fund

Fund Benchmark FTSE All-Share Index FTSE SmallCap Index FTSE 100 Index FTSE UK World Index Composite of the FTSE All-Share Core Index and the performance of the capped single stocks FTSE GWA UK Index

Index 1 year % % 5.3 5.3 -10.0 -10.5 7.4 7.4 7.1 7.1

Fund Index 3 years p.a. % % 14.5 14.5 10.1 9.7 n/a n/a 14.2 14.2

Fund Index 5 years p.a. % % 15.4 15.4 16.4 16.0 n/a n/a 14.6 14.6

5.1 1.6

5.2 1.5

n/a n/a

FTSE All-Share Index (ex-large stocks) BP Single Stock GSK Single Stock HSBC Single Stock LGIM RDS Composite Vodafone Single Stock

2.7 12.4 -1.2 -5.0 21.2 38.2

2.7 12.5 -1.2 -5.0 21.7 38.2

n/a n/a n/a n/a n/a n/a

REGIONAL EQUITY FUNDS North America Equity Index Fund North America Equity Index Fund – GBP Currency Hedged Europe (ex-UK) Equity Index Fund Europe (ex-UK) Equity Index Fund – GBP Currency Hedged Europe Equity Index Fund Eurozone Equity Index Fund Europe (ex-UK & Eurozone) Index Fund Japan Equity Index Fund Japan Equity Index Fund – GBP Currency Hedged Asia Pacific (ex-Japan) Developed Equity Index Fund Asia Pacific (ex-Japan) Developed Equity Index Fund – GBP Currency Hedged Asia Pacific (ex-Japan) Equity Index Fund

FTSE World North America Index FTSE World North America Index on a currency hedged basis against sterling FTSE World Europe (ex-UK) Index FTSE World Europe (ex-UK) Index on a currency hedged basis against sterling FTSE World Europe Index FTSE World Eurobloc Index FTSE World Europe (ex-Eurobloc/UK) Index FTSE World Japan Index FTSE World Japan Index on a currency hedged basis against sterling FTSE World Asia Pacific (ex-Japan) Developed Index FTSE World Asia Pacific (ex-Japan) Developed Equity Index on a currency hedged basis against sterling FTSE World Asia Pacific (ex-Japan) Index

5.6 6.7 15.6 8.5 12.8 18.4 6.3 -6.1 -6.4 34.9

5.6 6.8 15.3 8.4 12.7 18.1 6.4 -6.4 -6.5 34.2

9.0 10.4 19.7 21.4 17.9 20.4 17.4 6.9 16.2 27.6

8.8 10.3 19.5 21.2 17.8 20.1 17.4 6.5 16.1 27.0

9.3 n/a 20.4 n/a 18.4 20.9 18.6 10.2 n/a 27.0

9.2 n/a 20.1 n/a 18.2 20.5 18.7 9.9 n/a 26.3

28.6 29.7

28.0 29.0

26.0 25.7

25.5 25.0

n/a 24.6

n/a 23.9

ETHICAL EQUITY FUNDS Ethical UK Equity Index Fund Ethical Global Equity Index Fund

FTSE4Good UK Equity Index FTSE4Good Global Equity Index

2.9 5.5

2.9 5.3

12.0 10.9

12.0 10.8

13.3 n/a

UK Wealth Weighted Equity Fund Flexible Weights UK Equity Index Product UK Core Equity Index Fund BP Stock Fund GSK Stock Fund HSBC Stock Fund Royal Dutch Shell Stock Fund Vodafone Stock Fund

Performance figures are shown without fees. All figures supplied on a mid to mid basis unless otherwise stated. Past performance is not a guide to future performance and the value of investments may go down as well as up. n/a – this period’s prior to the Fund’s lunch date. Exchange rate changes may cause the value of overseas investments to rise or fall. However where stated this risk has been reduced by currency hedging.

LGIM Pooled Pension Funds Annual Report 2007

INDEX FUND PERFORMANCE 2007 INDEX EQUITY FUNDS Fund GLOBAL EQUITY FUNDS Global Equity (70:30) Index Fund Global Equity Fixed Weights (60:40) Index Fund Global Equity Fixed Weights (50:50) Index Fund Global Equity Market Weights (50:50) Index Fund Global Equity Index/Active Fund World (ex-UK) Equity Index Fund World Equity Index Fund World (ex-Eurozone) Equity (Net Withholding Tax) Index Fund Global Equity Fixed Weights (60:40) Index Fund – GBP Currency Hedged

Fund Benchmark Composite Composite Composite Composite Composite FTSE World (ex-UK) Index FTSE World Equity Index FTSE World (ex-Eurobloc) Index Composite on a currency hedged basis against sterling

Fund Index 3 years p.a. % % 15.4 15.3 14.6 14.4 14.6 14.4 13.9 13.8 15.3 15.3 13.2 12.9 13.3 13.1 11.8 11.6 n/a n/a

Fund Index 5 years p.a. % % 16.2 16.0 15.5 15.3 15.5 15.3 n/a n/a 16.0 16.0 13.5 13.3 13.6 13.4 12.2 12.1 n/a n/a

CONSENSUS FUNDS Consensus Index Fund Overseas Equity Consensus Index Fund

Composite Composite

8.7 14.3

8.6 14.1

14.0 17.4

13.9 17.0

14.4 17.8

14.2 17.4

EMERGING MARKET FUNDS Global Emerging Markets Equity Index Fund Asia Emerging Markets Equity Index Fund EMEA Emerging Markets Equity Index Fund Latin America Equity Index Fund World Emerging Markets Equity Index Fund

S&P/IFCI Global Emerging Market Index S&P/IFCI Asia Index S&P/IFCI Europe/MidEast/Africa Index S&P/IFCI Latin America Index FTSE All World Emerging Markets Index

39.1 41.2 28.1 49.9 37.7

37.6 39.7 26.3 49.7 37.1

35.4 33.5 32.5 46.5 n/a

34.8 32.8 31.9 46.7 n/a

33.0 28.8 34.2 44.7 n/a

32.7 28.3 33.6 45.5 n/a

MULTINATIONALS AND EX-MULTINATIONAL FUNDS Multinationals Equity Index Fund UK Equity Index Fund (ex-Multinationals) US Equity Index Fund (ex-Multinationals) Europe (ex-UK) Equity Index Fund (ex-Multinationals) Japan Equity Index Fund (ex-Multinationals) Pacific (ex-Japan) Equity Index Fund (ex-Multinational)

FTSE Multinational Index FTSE All-Share (ex-Multinationals) Index FTSE Local USA Index FTSE Local Europe (ex-UK) Index FTSE Local Japan Index FTSE Local Pacific Basin (ex-Japan)

14.2 -9.7 -3.9 15.9 -6.7 36.0

14.1 -9.7 -4.0 15.5 -6.9 35.3

14.0 11.1 5.6 20.8 6.1 27.6

13.8 11.1 5.4 20.4 5.8 27.2

13.0 15.2 7.3 23.0 10.5 27.6

12.9 15.2 7.1 22.6 10.2 27.0

Index 1 year % % 7.9 7.9 7.1 7.0 7.5 7.5 7.5 7.5 7.5 7.9 9.7 9.6 9.5 9.3 7.6 7.5 6.1 6.1

LGIM Pooled Pension Funds Annual Report 2007

INDEX BOND FUNDS FTSE A Government (All Stocks) Index FTSE A Government (Over 15 Year) Index FTSE A Government (5 to 15 Year) Index FTSE A Government (0 to 5 Year) Index FTSE A Government (Under 15 Year) Index FTSE A Index-Linked (All Stocks) Index FTSE A Index-Linked (Over 5 Year) Index FTSE A Index-Linked (Over 15 Year) Index Single stock Treasury 4.25% 7 December 2055 Gilt Single stock Treasury 4.75% 7 December 2038 Gilt Single stock Treasury 4.75% 7 December 2038 Gilt Single stock Treasury 2.00% 26 January 2035 Index-Linked Gilt Single stock Treasury 1.25% 22 November 2055 Index-Linked Gilt

Index 1 year % % 5.2 5.3 2.7 2.7 6.4 6.4 6.8 6.8 6.7 6.6 8.5 8.5 8.6 8.6 9.5 9.3 -0.8 -0.8 2.4 2.3 0.5 0.5 10.6 10.6 10.3 10.2

AGGREGATE BOND FUNDS Pre-Retirement Fund Long Dated Bond Fund

Composite Composite

-0.3 5.3

-0.8 5.7

3.6 5.9

3.4 5.9

n/a n/a

UK CORPORATE BOND FUNDS AAA Fixed Interest – All Stocks – Fund AAA Fixed Interest – Over 15 Year – Fund AAA-AA-A Corporate Bond – All Stocks – Index Fund AAA-AA-A Corporate Bond – Over 15 Year – Index Fund Investment Grade Corporate Bonds – All Stocks – Index Fund Investment Grade Corporate Bonds – Over 15 Year – Index Fund

iBoxx £ Sovereign & Sub-Sovereign AAA Index iBoxx £ Sovereign & Sub-Sovereign AAA 15 Year+ Index iBoxx £ Non-Gilts (ex-BBB) Index iBoxx £ Non-Gilts (ex-BBB) 15 Year+ Index iBoxx £ Non-Gilts Index iBoxx £ Non-Gilts 15 Year+ Index

4.8 2.1 2.4 -0.7 2.3 -0.6

5.2 3.0 1.9 -1.2 1.8 -1.2

4.7 4.8 3.9 3.5 4.0 3.7

4.8 4.8 3.7 3.3 3.8 3.4

4.7 4.9 4.7 4.7 n/a n/a

4.7 4.9 4.5 4.6 n/a n/a

Fund UK GOVERNMENT BOND FUNDS All Stocks Gilts Index Fund Over 15 Year Gilts Index Fund 5 to 15 Years Gilts Index Fund 0 to 5 Year Gilts Index Fund Under 15 Year Gilts Index Fund All Stocks Index-Linked Gilts Index Fund Over 5 Year Index-Linked Gilts Index Fund Over 15 Year Index-Linked Gilts Index Fund 2055 Gilt Fund 2038 Gilt Fund 2046 Gilt Fund 2035 Index-Linked Gilt Fund 2055 Index-Linked Gilt Fund

Fund Benchmark

Fund Index 3 years p.a. % % 4.6 4.6 4.5 4.5 4.5 4.5 4.8 4.8 n/a n/a 6.8 6.7 6.9 6.9 n/a n/a n/a n/a 4.9 4.8 n/a n/a 9.9 9.9 n/a n/a

Fund Index 5 years p.a. % % 4.5 4.5 4.6 4.6 4.4 4.4 4.5 4.4 n/a n/a 7.1 7.0 7.4 7.3 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

LGIM Pooled Pension Funds Annual Report 2007

INDEX FUND PERFORMANCE 2007 INDEX BOND FUNDS Fund INTERNATIONAL BOND FUNDS Overseas Bond Index Fund Overseas Bond Index Fund – GBP Currency Hedged Over 5 Year US Index-Linked Index Fund Over 5 Year US Index-Linked Index Fund – GBP Currency Hedged Eurozone Government Bond – All Stocks – Index Fund Eurozone Government Bond – Over 10 Year – Index Fund Eurozone Government Bond – Over 5 Year – Index Fund Eurozone Over 5 Year Inflation-Linked Index Fund Eurozone 1 to 10 Year Inflation-Linked Index Fund Eurozone Government Bond – Over 15 Year – Index Fund Eurozone Government Bond – 20 Year Target Duration – Index Fund

Fund Benchmark JP Morgan Global Government (ex-UK) Traded Bond Index JP Morgan Global Government (ex-UK) Traded Bond Index Hedged Lehman Brothers US Tips Over 5 Year Index Lehman Brothers US Tips Over 5 Year Index Hedged EMU Government Bond All Stocks Index EMU Government Bond Over 10 Year Index EMU Government Bond Over 5 Year Index Barclays Capital Euro Government EMU HICP-Linked Over 5 Year Index Barclays Capital Euro Government EMU HICP-Linked 1 to 10 Year Index EMU Government Bond Over 15 Year Index Barclays Euro Government Bond 20 Year Duration Index

Index 1 year % % 8.6 9.2 6.3 6.5 10.4 10.4 12.8 12.7 11.0 11.0 6.7 6.8 9.3 9.4 10.0 9.9 13.0 12.9 5.8 5.9 1.4 1.5

NEW FUNDS LAUNCHED IN 2007

Fund Index 5 years p.a. % % 2.8 2.1 n/a n/a 2.2 2.2 7.9 8.0 6.2 6.2 7.3 7.3 6.8 6.7 n/a n/a n/a n/a n/a n/a n/a n/a

Fund Index Since launch % %

Fund INDEX EQUITY FUNDS Global Infrastructure Equity Index Fund Global Listed Private Equity Passive Fund Global Real Estate Equity Index Fund World (ex UK) Equity Index Fund – GBP Currency Hedged Global (ex UK) Fixed Weights Index Fund Global Equity Fixed Weights (50:50) Index Fund – GBP Currency Hedged World Equity Index Fund – GBP Currency Hedged

Benchmark

Launch date

LPX Composite Index FTSE EPRA/NAREIT Global Real Estate Index FTSE Macquarie Global Infrastructure 100 Index FTSE World (ex-UK) Index Composite Composite FTSE World Equity Index

17/07/2007 21/02/2007 17/07/2007 02/01/2007 17/10/2007 22/05/2007 25/04/2007

-12.9 -2.1 8.4 -0.4 -5.4 -1.9

-11.9 -2.9 8.3 -0.4 -5.4 -2.4

UK GOVERNMENT BONDS FUNDS 2037 Index Linked Gilt Fund Under 15 Year Index Linked Gilt Fund 2042 Gilt Fund

Single stock Treasury 1.125% 22 November 2037 FTSE-A British Government Index-Linked Under 15 Year Index Single Stock Treasury 4.5% 7 December 2042

07/03/2007 07/06/2007 20/06/2007

% 10.3 9.2 11.0

% 10.2 8.6 10.9

CORPORATE BONDS FUND Investment Grade Corporate Bonds – 1-15 Year – Index Fund

iBoxx £ Non-Gilts 1-15 Year Index

25/07/2007

4.0

3.7

Fund Index 3 years p.a. % % 1.4 1.8 5.2 5.2 3.7 3.7 5.4 5.4 3.5 3.5 3.3 3.3 3.4 3.4 3.2 3.1 n/a n/a n/a n/a n/a n/a

LGIM Pooled Pension Funds Annual Report 2007

INDEX FUND PERFORMANCE 2007: IN EURO INDEX EQUITY FUNDS IN EURO Fund INDEX EQUITY FUNDS UK Equity Index Fund UK World Equity Index Fund UK World Equity Index Fund – EUR Currency Hedged North America Equity (Net US Withholding Tax) Index Fund North America Equity (Net US Withholding Tax) Index Fund – EUR Currency Hedged Europe (ex-eurozone) Equity Index Fund Europe Equity Index Fund Eurozone Equity Index Fund Japan Equity Index Fund Japan Equity Index Fund – EUR Currency Hedged Asia Pacific (ex-Japan) Developed Equity Index Fund Asia Pacific (ex-Japan) Equity Index Fund World (ex-Eurozone) Equity (Net Withholding Tax) Index Fund World Equity (Net Withholding Tax) Index Fund Global Emerging Markets Equity Index Fund Ethical Global Equity (Net Withholding Tax) Index Fund OLAB North America Equity Index Fund – CCF Ethical Global Equity (Net Withholding Tax) Index Fund Japan Equity (Net Withholding Tax) Index Fund Japan Equity (Net Withholding Tax) Index Fund – GBP Currency Hedged

Fund Benchmark FTSE All-Share Index FTSE UK World Index FTSE UK World Index on a currency hedged basis against euro FTSE World North America Index FTSE World North America Index on a currency hedged basis against euro FTSE World Europe (ex-eurobloc) Equity Index FTSE World Europe Index FTSE World Eurobloc Index FTSE World Japan Equity Index FTSE World Japan Equity Index on a currency hedged basis against euro FTSE World Asia Pacific (ex-Japan) Developed Equity Index FTSE World Asia Pacific (ex-Japan) Equity Index FTSE World (ex-Eurobloc) Equity Index FTSE World Equity Index S&P/IFCI Global Emerging Market Index FTSE4Good Global Equity Index FTSE World North America Index FTSE4Good Global Index FTSE World Japan Index FTSE World Japan Index on a currency hedged basis against sterling

INDEX BOND FUNDS IN EURO Fund INDEX BOND FUNDS Eurozone Government Bond – All Stocks – Index Fund Eurozone Government Bond – Over 10 Year – Index Fund Eurozone Government Bond – Over 5 Year – Index Fund Eurozone Over 5 Year Inflation-Linked Index Fund Eurozone 1 to 10 Year Inflation-Linked Index Fund Eurozone Government Bond – Over 15 Year – Index Fund Eurozone Government Bond – 20 Year Target Duration – Index Fund

Index 1 year % % -3.4 -3.4 -1.8 -1.7 5.2 5.3 -3.3 -3.4

4.8 -2.5 3.5 8.6 -13.9 -8.0 23.7 19.0 -1.3 0.3 27.6 -3.2 -3.1 -3.2 -14.0 -14.3

Fund Benchmark EMU Government Bond All Stocks Index EMU Government Bond Over 10 Year Index EMU Government Bond Over 5 Year Index Barclays Capital Euro Government EMU HICP-Linked Over 5 Year Index Barclays Capital Euro Government EMU HICP-Linked 1 to 10 Year Index EMU Government Bond Over 15 Year Index Barclays Euro Government Bond 20 Year Duration Index

4.7 -2.4 3.3 8.3 -14.1 -8.0 23.1 18.3 -1.4 0.1 26.3 -3.4 -3.1 -3.5 -14.2 -14.3

Index 1 year % % 1.8 1.8 -2.1 -2.0 0.3 0.3 0.9 0.8 3.6 3.6 -2.9 -2.8 -7.0 -6.9

Fund Index 3 years p.a. % % 13.1 13.1 12.8 12.8 11.9 11.8 7.3 7.3 7.9 16.0 16.5 18.9 5.6 14.0 26.0 24.2 10.4 11.7 33.7 9.5 n/a 9.5 5.6 14.8

7.8 16.0 16.3 18.6 5.2 13.7 25.5 23.5 10.3 11.6 33.2 9.5 n/a 9.4 5.2 14.7

Fund Index 3 years p.a. % % 2.2 2.3 2.1 2.1 2.1 2.1 1.9 1.9 n/a n/a n/a n/a n/a n/a

Fund Index 5 years p.a. % % 12.7 12.7 11.9 11.9 n/a n/a 6.5 6.5 n/a 15.8 15.6 18.0 7.6 n/a 24.0 21.7 9.6 10.8 29.8 n/a n/a n/a 7.6 n/a

n/a 15.9 15.4 17.7 7.3 n/a 23.4 21.0 9.4 10.6 29.6 n/a n/a n/a 7.3 n/a

Fund Index 5 years p.a. % % 3.7 3.7 4.8 4.8 4.3 4.2 n/a n/a n/a n/a n/a n/a n/a n/a

LGIM Pooled Pension Funds Annual Report 2007

ACTIVE FUND PERFORMANCE 2007 ACTIVE BOND FUNDS Fund ACTIVE AGGREGATE FUNDS Active Aggregate All Stocks (50:50) Fixed Interest Fund Active Aggregate Long Dated (33:33:33) Bond Fund Active Aggregate Long Dated (50:25:25) Bond Fund Active Aggregate Long Dated (50:50) Fixed Interest Fund Active Aggregates All Stocks (33:33:33) Bond Fund

ACTIVE CORPORATE BOND FUNDS Active Corporate Bond – All Stocks – Fund Active Corporate Bond – All Stocks – Fund (RPI** Linked 2025)

Active Corporate Bond – All Stocks – Fund (RPI* Linked 2035)

Active Corporate Bond – All Stocks – Fund (RPI* Linked 2045)

Active Corporate Bond – All Stocks – Fund (RPI* Linked)

Active Corporate Bond – All Stocks – Fund 2025

Active Corporate Bond – All Stocks – Fund 2035

Active Corporate Bond – All Stocks – Fund 2045

Active Corporate Bond – Over 10 Year Fund

Fund Benchmark 50% FTSE A Government (All Stocks) Index and 50% iBoxx £ Non-Gilt Index Equal parts in FTSE A Government (Over 15 Year) Index, FTSE A Index-Linked (Over 5 Year) Index, and iBoxx £ Non-Gilt Over 10 Year Index 50% FTSE A Index-Linked (Over 5 Year) Index, 25% FTSE A Government (Over 15 Year) Index and 25% iBoxx £ Non-Gilt 10 Year + Index 50% FTSE A Government (Over 15 Year) Index and 50% iBoxx £ Non-Gilt 10 Year + Index Equal parts in FTSE A Index-Linked (All Stocks) Index, FTSE A Government (All Stocks) Index and iBoxx £ Non-Gilt Index

iBoxx £ Non-Gilts Index For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single RPI* linked receipt in 2025 For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single RPI* linked receipt in 2035 For corporate bond holdings: iBoxx £ Non-Gilts Index: For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single RPI* linked receipt in 2045 For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and RPI Linked receipts with similar maturities to the payments For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single receipt in 2025 For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single receipt in 2035 For corporate bond holdings: iBoxx £ Non-Gilts Index For swaps: A tailored portfolio of swaps with payments based on iBoxx £ Non-Gilts Index and a single receipt in 2045 iBoxx £ Non-Gilts 10 Year+ Index

* Retail Price Index. Performance figures are shown without fees. All figures supplied on a mid to mid basis unless otherwise stated. Past performance is not a guide to future performance and the value of investments may go down as well as up. n/a – this period’s prior to the Fund’s lunch date. Exchange rate changes may cause the value of overseas investments to rise or fall.

LGIM Pooled Pension Funds Annual Report 2007

Index 1 year % % 4.1 3.5

Fund Index 3 years p.a. % % 4.5 4.2

Fund Index 5 years p.a. % % n/a n/a

3.3

3.6

n/a

4.4

4.9

5.4

n/a

1.3

1.1

4.1

3.9

n/a

5.1

5.2

n/a

2.5

1.8

4.1

3.8

5.1

4.7

6.0

n/a

10.0

n/a

11.7

n/a

5.2

n/a

-0.4

n/a

-5.0

n/a

-8.5 -0.2

n/a -0.4

n/a 3.6

n/a 3.4

n/a 5.1

n/a 4.7

ACTIVE BOND FUNDS Fund UK FIXED INTEREST FUNDS UK Fixed Interest – All Stocks – Fund UK Fixed Interest – Over 15 Year – Fund CASH AND MONEY MARKET FUNDS Cash Fund Money Market Fund OTHER ACTIVE BOND FUNDS High Yield Bond Fund FTSE 350 Higher Yield Index Index-Linked Bond Fund Overseas Bond Fund

Fund Benchmark FTSE A Government (All Stocks) Index FTSE A Government (Over 15 Year) Index

Index 1 year % % 5.3 5.3 2.6 2.7

Fund Index 3 years p.a. % % 4.6 4.6 4.5 4.5

Fund Index 5 years p.a. % % 4.6 4.5 n/a n/a

Mellon Analytical Solutions CAPS Pooled Pension Fund Survey Median 3-month LIBID Notice Rate

-5.9 5.0

5.8 6.1

5.1 5.0

5.1 5.2

4.7 4.8

4.6 4.8

Composite of the Merrill Lynch Global High Yield BB-B indices and the Merrill Lynch GBP LIBID Overnight Index FTSE 350 Higher Yield Index FTSE A Index-Linked (Over 5 Year) Index Mellon Analytical Solutions CAPS Pooled Pension Fund Survey Median

3.0 1.2 8.1 8.6

3.2 1.2 8.6 9.2

n/a n/a 6.8 1.4

n/a n/a 6.9 1.8

n/a n/a 7.4 2.8

n/a n/a 7.3 2.1

Performance figures are shown net of fees except for the UK Concentrated Equity Fund. The ad-valorem management charges which include custody, are directly invoiced to clients. Consequently, they are not reflected in the bid and offer prices.

ACTIVE EQUITY FUNDS Fund UK ACTIVE EQUITY FUNDS UK Concentrated Equity Fund UK Smaller Companies Fund OVERSEAS ACTIVE EQUITY FUNDS North America Equity Fund Europe (ex-UK) Equity Fund Japan Equity Fund Pacific Basin (ex-Japan) Equity Fund International Equity Fund Discretionary Fund

Fund Benchmark FTSE All-Share Index FTSE SmallCap Index

FTSE World North America Index FTSE World Europe (ex-UK) Index FTSE World Japan Index FTSE All World Asia Pacific (ex-Japan) Index Mellon Analytical Solutions CAPS Pooled Pension Fund Survey Median Mellon Analytical Solutions CAPS Pooled Pension Fund Survey Median

PROPERTY FUND Fund PROPERTY FUND Property Fund

Index 1 year % % 5.4 5.3 -8.7 -17.9

9.7 9.5 -10.3 41.7 13.0 8.1

Fund Benchmark Mellon Analytical Solutions CAPS Pooled Pension Fund Survey Median

5.6 15.3 -6.4 29.0 14.1 8.1

Index 1 year % % -5.2 -5.9

Fund Index 3 years p.a. % % 16.3 14.5 11.7 6.3

9.5 16.4 4.2 31.3 16.1 14.0

8.8 19.5 6.5 25.0 17.0 13.8

Fund Index 3 years p.a. % % 10.1 9.8

Fund Index 5 years p.a. % % 15.9 15.4 18.6 13.8

8.0 17.0 8.6 29.2 16.1 14.1

9.2 20.1 9.9 23.9 17.4 14.2

Fund Index 5 years p.a. % % 12.3 11.4

Source: The CAPS Pooled Property Median returns are from Russell/Mellon CAPS and are not calculated net of management fees on a NAV to NAV basis. Past performance is not a guide to future performance and the value of investments may go down as well as up. n/a – this period’s prior to the Fund’s lunch date. Performance figures are shown without fees. All figures supplied on a mid to mid basis unless otherwise stated. Exchange rate changes may cause the value of overseas investments to rise or fall.

LGIM Pooled Pension Funds Annual Report 2007

Registered office Legal & General Investment Management Limited One Coleman Street London EC2R 5AA T +44 (0)20 7489 1888 F +44 (0)20 7528 6850 Registered in England Number: 1006112

Important Information The Funds, and any fund in which they may invest, are sections of the Legal and General Assurance (Pensions Management) Limited (PMC) managed pooled fund policy, a unit linked life insurance policy. The policy is only available to pension schemes. ”). Legal & General Investment Management Limited provides investment and marketing services to PMC. Both companies are authorised and regulated by the Financial Services Authority. The FTSE UK, FTSE All-World™ and FTSE4Good™ index series are calculated by FTSE International Limited ("FTSE™"). FTSE™ does not sponsor, endorse or promote these funds. The FTSE Global Bond index series is operated by FTSE International Limited in conjunction with Reuters, the Institute of Actuaries and the Faculty of Actuaries. FTSE™, Reuters, the Institute of Actuaries and the Faculty of Actuaries accept no liability in connection with the trading of any products on these indices. All copyright in the indices’ values and constituent lists belong to FTSE™. Legal & General Investment Management Limited has obtained full licence from FTSE to use such copyright in the creation of this product. ""FTSE™", "FT-SE®" and "Footsie®" are trademarks of the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE International Limited ("FTSE™") under licence. "All-Share™", "All-World™" and "FTSE4Good™" are trademarks of FTSE™."" At least 55% of this paper is made from recycled materials.