Aging Demographics And ESG Trends Will Transform Pension Markets

Key Takeaways

• Redeployment of capital and new partnerships could drive faster-than-expected revenue and margin growth through expanded investment capabilities and increased third-party capital inflows.
  
• Market dominance in pensions and annuities, along with investments in housing, ESG, and digitalization, positions the company for sustained, above-market growth and efficiency gains.
  
• Heavy reliance on mature markets and core annuity products exposes Legal & General to demographic, regulatory, and competitive risks, threatening long-term growth and profitability.

Catalysts

Provides various insurance products and services in the United Kingdom, the United States, and internationally.

• Analysts broadly agree that capital redeployment from non-core asset disposals will boost growth in core businesses, but given Legal & General's £14.8 billion store of future profit, accelerating capital recycling into U.S. PRT and high-margin asset management could deliver an even more rapid and outsized uplift to revenue and net margins than consensus expects, particularly as ongoing disposals generate new investment firepower.
  
• Analyst consensus expects the Asset Management partnership with Meiji Yasuda and its $1 billion commitment to be catalytic, but Legal & General's early success in fundraising for Private Markets suggests that this partnership-combined with boardroom ambitions for further cornerstone investors-may unlock third-party capital at a magnitude well above forecasts, sharply expanding fee revenue and profit margins through scale advantage and product leadership.
  
• Legal & General's dominant share in both the U.K. PRT space and Retail annuities positions it to disproportionately benefit from the wave of defined benefit pension de-risking and the secular rise in demand for retirement solutions, setting the stage for sustained, above-market growth in institutional and retail revenue streams as populations age and corporate demand for bulk annuities continues to outstrip supply.
  
• The company's ramp-up in deploying direct investments into affordable housing and infrastructure-supported by regulatory and government tailwinds favoring scale and ESG integration-could significantly boost investment returns and recurring fee income, improving net margins as illiquid asset allocations command higher yields and attract new mandates from sustainability-focused institutional clients.
  
• Ongoing investment in digitalization, data analytics, and operational synergies across the three simplified businesses is likely to drive sustained cost efficiencies and accelerate customer acquisition, potentially lowering the cost-to-income ratio more rapidly than expected and disproportionately enhancing long-term earnings and shareholder returns.

Legal & General Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Legal & General Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Legal & General Group's revenue will decrease by 3.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 2.2% today to 17.8% in 3 years time.
• The bullish analysts expect earnings to reach £1.9 billion (and earnings per share of £0.33) by about August 2028, up from £259.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 12.4x on those 2028 earnings, down from 55.6x today. This future PE is lower than the current PE for the GB Insurance industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Legal & General Group Future Earnings Per Share Growth

Risks

• Legal & General's heavy exposure to the maturing UK and other developed markets, characterized by ageing populations and declining birth rates, may limit long-term growth opportunities for its insurance and pension business, potentially leading to reduced revenues over time.
  
• Heightening competition in both the bulk annuity market and digital insurance platforms could drive margin pressures and market share loss, risking profitability and future revenues as more players enter their core markets and direct-to-consumer models gain traction.
  
• Prolonged periods of low or volatile interest rates could depress returns on Legal & General's large annuity and investment portfolios, directly impacting net investment income and eroding profitability, particularly as the company emphasizes capital-light growth.
  
• Cost pressures arising from increased ESG compliance, accelerated digital transformation, and ongoing investments in technology may raise the cost base without guaranteed near-term revenue uplift, resulting in sustained pressure on net margins and expense ratios.
  
• The company's concentration in annuities and bulk purchase pension risk transfer exposes it to adverse longevity trends, regulatory tightening (such as changes to Solvency II requirements), and potential demographic shifts, all of which could require higher reserves and reduce net earnings stability in future years.

Valuation

• The assumed bullish price target for Legal & General Group is £3.32, which represents two standard deviations above the consensus price target of £2.64. This valuation is based on what can be assumed as the expectations of Legal & General Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.35, and the most bearish reporting a price target of just £2.15.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £10.8 billion, earnings will come to £1.9 billion, and it would be trading on a PE ratio of 12.4x, assuming you use a discount rate of 6.8%.
• Given the current share price of £2.55, the bullish analyst price target of £3.32 is 23.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.