Section I: Other notes

I: Other notes

I1: Staff and pension plans

(a) Staff and employment costs

The average number of staff employed by the Group during the year were:

	2006 £m	2005 £m
Business operations:
UK operations	10,914	10,708
US operations	2,863	2,588
Asian operations	12,114	9,652
Venture investment subsidiaries of the PAC with-profits fund	8,898	8,713
Total	34,789	31,661

The costs of employment were:

	2006 £m	2005 £m
Business operations:
Wages and salaries	825	799
Social security costs	65	64
Other pension costs (see below)	72	77
Pension actuarial gains credited to income statement	(469)	(155)
	(397)	(78)
Venture investment subsidiaries of the PAC with-profits fund (see below)	230	206
Total	723	991

Other pension costs comprises £45 million (2005: £54 million) relating to defined benefit schemes and £27 million (2005: £23 million) relating to defined contribution schemes. Of the defined contribution scheme costs, £14 million (2005: £13 million) related to overseas defined contribution schemes. The £45 million (2005: £54 million) comprises £29 million (2005: £43 million) charge on an economic basis, reflecting the total assets of the schemes, and a further £16 million (2005: £11 million) charge to adjust for amounts invested in Prudential insurance policies to arrive at the IAS 19 basis charge. The £469 million (2005: £155 million) of actuarial gains comprises £485 million (2005: £171 million) of actuarial gains on an economic basis and £16 million (2005: £16 million) actuarial losses for amounts invested in Prudential insurance policies. The derivation of these amounts is shown in note (b)(i)7 below.

Of the £230 million (2005: £206 million) costs of employment for venture investment subsidiaries, £189 million (2005: £169 million) relates to wages and salaries, £27 million (2005: £31 million) relates to social security costs and £14 million (2005: £6 million) relates to pension costs.

(b) Pension plans

(i) Defined benefit plans

1. Summary

The Group business operations operate a number of pension schemes. The specific features of these plans vary in accordance with the regulations of the country in which the employees are located, although they are, in general, funded wholly by the Group and based either on a cash balance formula or on years of service and salary earned in the last year or years of employment. The largest defined benefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). 88 per cent (2005: 90 per cent) of the liabilities of the Group defined benefit schemes are accounted for within PSPS.

The Group also operates two smaller defined benefit schemes for UK employees in respect of Scottish Amicable and M&G activities. For all three schemes the projected unit method was used for the most recent full actuarial valuations. There is also a small defined benefit scheme in Taiwan.

As at 31 December 2006, the shareholders’ share of the surplus for PSPS and the deficits of the other schemes amounted to an £8 million deficit net of related tax relief (2005: £153 million deficit). These amounts are determined after including amounts invested by PSPS and the M&G scheme in Prudential policies as explained later in this note.

Defined benefit schemes in the UK are generally required to be subject to full actuarial valuation every three years to assess the appropriate level of funding for schemes having regard to their commitments. These valuations include assessments of the likely rate of return on the assets held within the separate trustee administered funds. PSPS was last actuarially valued as at 5 April 2005 and this valuation demonstrated the scheme to be 94 per cent funded, with a shortfall of actuarially determined assets to liabilities of six per cent, representing a deficit of £243 million.

The finalisation of the valuation as at 5 April 2005 was accompanied by changes to the basis of funding for the scheme. For 2006 and future years, deficit funding amounts designed to eliminate the actuarial deficit over a 10-year period have been and are being made. Total contributions to the Scheme for deficit funding and employer’s contributions for ongoing service for current employees are expected to be of the order of £70-75 million per annum over a 10-year period. However, in the calendar year 2006, total contributions were £137 million. This amount reflects an increased level of current contributions for ongoing service and deficit funding backdated to 6 April 2005. These amounts compared to total contributions in 2005 of £19 million.

Under IAS 19 the basis of valuation differs markedly from the full triennial valuation basis. In particular, IAS 19 requires assets of the scheme to be valued at their market value at the year end, while pension liabilities are required to be discounted at a rate consistent with the current rate of return on a high quality corporate bond. As a result, the difference between IAS 19 basis assets and liabilities can be volatile. For those schemes such as PSPS, which hold a substantial proportion of their assets in equity investments, the volatility can be particularly significant. The economic basis (including investments of PSPS and the M&G scheme in Prudential policies as assets) for 2006, a £28 million (2005: £21 million) pre-tax shareholder charge to operating results based on longer-term returns arises. In addition, outside the operating result, but included in total profits is a pre-tax shareholder credit of £167 million (2005: £32 million) for net actuarial gains.

In addition, also on the economic basis, the PAC with-profits sub-fund was charged £1 million (2005: £22 million) for the aggregate of service cost and net finance income and benefited by £318 million (2005: £139 million) for its share of net actuarial gains on the scheme assets and liabilities. As shareholder profits for the PAC with-profits sub-fund reflects the surplus for distribution, these amounts are effectively absorbed by an increased charge in the income statement for the transfer to the liability for unallocated surplus.

The actuarial gains primarily represent the difference between actual and expected investment returns for the schemes and the reduction in liabilities caused by an increase in the discount rate caused by increases in corporate bond returns.

In 2006, the PSPS asset allocation was altered away from equity investments such that at 31 December 2006 the market value of equities for the Group’s defined benefit schemes represented 31 per cent (2005: 52 per cent) of the total asset value whilst the bond portfolio accounted for 43 per cent (2005: 34 per cent). The asset allocation is shown in note 5.

Surpluses and deficits on the Group’s defined benefit schemes are apportioned to the PAC life fund and shareholders’ funds based on estimates of employees’ service between them. At 31 December 2005, the deficit on the PSPS was apportioned in the ratio 70/30 between the life fund and shareholder-backed operations. This ratio was determined following extensive analysis of the source of the cumulative funding for the scheme to that date.

This basis has been applied for 2006 to the asset and liability movements relating to the position at 1 January 2006, and also to the deficit funding paid in the year. However, the IAS 19 service cost for the year and employer contributions for ongoing service of current employees, have been apportioned in the ratio relevant to current activity. Reflecting these two elements, at 31 December 2006, the total share of the surplus on PSPS and the deficit on the smaller Scottish Amicable scheme attributable to the PAC with-profits fund amounted to a net surplus of £66 million net of related tax relief.

The discussions with the Scheme Trustee also led to an altered expectation in 2005 as to future discretionary increases. Previously, it had been the custom to award discretionary increases by reference to inflation levels. From 2005 it was intended that discretionary increases will in most circumstances not exceed 2.5 per cent.

2. Corporate Governance

The rules of the Group’s largest pension arrangement, the defined benefit section of PSPS, a final salary scheme, specify that, in exercising its investment powers, the Trustee’s objective is to achieve the best overall investment return consistent with the security of the assets of the scheme. In doing this, regard is had to the nature and duration of the scheme’s liabilities. The Trustee sets the benchmark for the asset mix, following analysis of the liabilities by the Scheme’s Actuary and, having taken advice from the Investment Managers, then selects benchmark indices for each asset type in order to measure investment performance against a benchmark return.

The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectives every three years, to coincide with the Actuarial Valuation, or earlier if the Scheme Actuary recommends. Interim reviews are conducted annually based on changing economic circumstances and financial market levels.

The Trustee sets the general investment policy and specifies any restrictions on types of investment and the degrees of divergence permitted from the benchmark, but delegates the responsibility for selection and realisation of specific investments to the Investment Managers. In carrying out this responsibility, the Investment Managers are required by the Pensions Act 1995 to have regard to the need for diversification and suitability of investments. Subject to a number of restrictions contained within the relevant investment management agreements, the Investment Managers are authorised to invest in any class of investment asset. However, the Investment Managers will not invest in any new class of investment asset without prior consultation with the Trustee.

The Trustee consults the Principal Employer, the Prudential Assurance Company, on these investment principles, but the ultimate responsibility for the investment of the assets of the scheme lies with the Trustee.

The investment policies and strategies for the other two UK defined benefit schemes, the M&G Group Pension Scheme and the Scottish Amicable Staff Pension Scheme, which are both final salary schemes, follow similar principles, but have different target allocations, reflecting the particular requirements of the schemes.

3. Assumptions

The actuarial assumptions used in determining benefit obligations and the net periodic benefit costs for the years ended 31 December were as follows:

	2006 £m	2005 £m
Discount rate	5.2	4.8
Rate of increase in salaries	5.0	4.8
Rate of increase of pensions in payment for inflation:
Guaranteed (maximum 5%)	3.0	2.8
Guaranteed (maximum 2.5%)*	2.5	2.5
Discretionary*	2.5	2.5
Expected returns on plan assets	5.9	6.1

*The rates of 2.5 per cent shown are those for PSPS. Assumed rates of increase of pensions in payment for inflation for all other schemes are 3.0 per cent in 2006 (2005: 2.8 per cent).

The change of assumption for discretionary increases first applied in 2005 following discussion with the PSPS trustee. For the purpose of future discretionary awards, it is assumed that a cap of a 2.5 per cent rate of increase will apply rather than, as previously applied, the assumed long-term inflation rate.

The calculations are based on current actuarially calculated mortality estimates with a specific allowance made for future improvements in mortality, which is broadly in line with that adopted for the 92 series of mortality tables prepared by the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries.

The tables used for PSPS at 31 December 2006 were:

Male: 100 per cent PMA92 with CMIR17 improvements to the valuation date and medium cohort improvements in future; and

Female: 100 per cent PFA92 with CMIR17 improvements to the valuation date and medium cohort improvements in future.

The assumed life expectancies on retirement at age 60, based on the mortality table used was:

	Years
	Male	Female
Retiring today	25.0	28.1
Retiring in 15 years’ time	26.1	29.1

The mean term of the current PSPS liabilities is around 20 years.

Using external actuarial advice provided by Watson Wyatt Partners for the valuation of PSPS and by Aon Limited for the M&G scheme, and internal advice for the Scottish Amicable scheme, the most recent full valuations have been updated to 31 December 2006, applying the principles prescribed by IAS 19.

4. Summary financial position

The Group liability in respect of defined benefit pension schemes is as follows:

	2006 £m	2005 £m
Economic position:
Surplus (deficit), gross of deferred tax, based on scheme assets held, including investments in Prudential insurance policies:
Attributable to the PAC with-profits fund (i.e. absorbed by the liability for unallocated surplus)	73	(329)
Attributable to shareholder-financed operations (i.e. to shareholders’ equity)	(8)	(214)
Economic surplus (deficit) – as explained in note 5 below	653	(543)
Add back: investments in Prudential insurance policies (offset on consolidation in the Group financial statements against insurance liabilities)	(287)	253)
Provision included in balance sheet under IAS 19 – as explained in note 7 below	(222)	(796)

The following disclosures explain the economic position and IAS 19 basis of accounting after eliminating investment in Prudential insurance policies on consolidation.

5. Group economic financial position

The economic financial position of the deferred benefit pension schemes reflects the total assets of the schemes including investments in Prudential policies. This is to be contrasted with the IAS 19 basis assets of the PSPS and M&G schemes, as consolidated into the Group balance sheet, which exclude investments in Prudential insurance policies which on the financial statement presentation are offset against policyholder liabilities.

(i) The surplus or deficits on the PSPS and Scottish Amicable schemes are partially attributable to the PAC with-profits fund; and

(ii) The M&G pension scheme has invested £161 million at 31 December 2006 (2005: £147 million) in Prudential insurance policies. Additionally, the PSPS scheme has invested £126 million at 31 December 2006 (2005: £106 million) in Prudential insurance policies. As required by IFRS, this amount of scheme asset is eliminated against the policyholder liability and hence, for the purposes of preparing the consolidated balance sheet, the IAS 19 basis net pension liability is £287 million (2005: £253 million) lower than the ‘economic basis’ surplus of £65 million (2005: ‘economic basis’ deficit of £543 million).

On the ‘economic basis’, after including the underlying assets represented by the investments in Prudential insurance policies as scheme assets, the assets of the schemes at 31 December were:

	2006			2005
	£m	%		£m	%
Equities	1,628	13		2543	52
Bonds	2,259	43		1663	34
Properties	638	12		590	12
Cash	750	14		79	2
Total value of assets	5,275	100		4,875	100

The present value of the liabilities of the four schemes at 31 December 2006 was £5,210 million (2005: £5,418 million). The resulting scheme surplus or deficit arising from the excess of assets over liabilities or vice versa at 31 December 2006 comprised surplus of £73 million (2005: deficit of £329 million) attributable to the PAC with-profits fund and deficit of £8 million (2005: deficit of £214 million) attributable to shareholder operations.

The movements in the deficit on the ‘economic basis’ between scheme assets and liabilities were:

	2006 £m	2005 £m
Current service cost	(69)	(65)
Contributions	152	29
Other finance income	40	22
Actuarial gains	485	171
Net decrease	608	157

Estimated pension scheme liability attributable to shareholder operations – economic basis

Movements on the pension scheme deficits (determined on the ‘economic basis’), to the extent attributable to shareholder operations are as follows:

2006			Actuarial and other gains and losses
	At beginning of year £m	Charge to operating results (based on longer-term investment returns) (note i) £m	Actuarial gains (losses) attributable to shareholders (note ii) £m	Charge for revised estimate PSPS of deficit allocation (note ii) £m	Contributions paid by shareholder operations £m	At end of year £m
Gross of tax deficit	(214)	(28)	167	–	67	(8)
Related deferred tax	61	9	(50)	–	(20)	0
Net of tax deficit	(153)	(19)	117	–	47	(8)
2005
Gross of tax deficit	(175)	(21)	32	(63)	13	(214)
Related deferred tax	49	6	(9)	19	(4)	61
Net of tax deficit	(126)	(15)	23	(44)	9	(153)

Since shareholder profits in respect of the PAC with-profits fund are a function of the actuarially determined surplus for distribution, the overall income statement result is not directly affected by the level of pension cost or other expenses attributable to the fund.

Included within the charge for 2005 of £374 million for changes in assumptions is a credit for past service costs of £115 million for a reduction in the assumed level of discretionary increase for future pensions in payment for PSPS.

Estimated pension scheme surplus (deficit) attributable to PAC with-profits fund – economic basis

Movements on the pension scheme surplus (deficits) (determined on the ‘economic basis’ under which PSPS scheme assets include investments in Prudential insurance policies) are as follows:

2006			Actuarial and other gains and losses
	At beginning of year £m	Service cost less net finance income (note i above) £m	Actuarial gains (losses) (note ii above) £m	Credit for revised estimate of PSPS deficit allocation (note ii above) £m	Contributions paid by PAC with-profits fund £m	At end of year £m
Gross of tax surplus (deficit)	(329)	(1)	318	–	85	73
Related deferred tax	33	0	(32)	–	(8)	(7)
Net of tax surplus (deficit)	(296)	(1)	286	–	77	66
2005
Gross of tax deficit	(525)	(22)	139	63	16	(329)
Related deferred tax	53	2	(14)	(6)	(2)	33
Net of tax deficit	(472)	(20)	125	57	14	(296)

The charges and credits for service cost, net finance income, and actuarial and other gains and losses are included within the income statement but taken account of in determining the charge in the income statement for the transfer to the liability for unallocated surplus of with-profits funds.

6. Movement in IAS 19 basis financial position

The change in the present value of the benefit obligation and the change in fair value of the assets for the total of the PSPS, Scottish Amicable, M&G and Taiwan schemes over the period were as follows:

2006	IAS 19 basis: change in fair value of plan assets £m	Investments in Prudential insurance policies £m	Economic basis: total assets £m	IAS 19 basis: change in present value of benefit obligation £m	Economic basis: net obligation £m
Fair value of plan assets, beginning of year	4,622	253	4,875		4,875
Present value of benefit obligation, beginning of year				(5,418)	(5,418)
	4,622	253	4,875	(5,418)	(543)
Service cost – current charge only				(69)	(69)
Interest cost				(255)	(255)
Expected return on plan assets	279	16	295		295
Employee contributions	1	1	2	(2)	-
Employer contributions	148	4	152		152
Actuarial gains	140	16	156	329	485
Benefit payments	(202)	(3)	(205)	205	-
Fair value of plan assets, end of year	4,988	287	5,275		5,275
Present value of benefit obligation, end of year				(5,210)	(5,210)
Economic basis surplus					65

2005	IAS 19 basis: change in fair value of plan assets £m	Investments in Prudential insurance policies £m	Economic basis: total assets £m	IAS 19 basis: change in present value of benefit obligation £m	Economic basis: net obligation £m
Fair value of plan assets, beginning of year	4,092	125	4,217		4,217
Present value of benefit obligation, beginning of year				(4,917)	(4,917)
	4,092	125	4,217	(4,917)	(700)
Less: PSPS scheme plan assets used to acquire Prudential insurance policies	(99)	99	–		–
Service cost – current charge only				(65)	(65)
Interest cost				(257)	(257)
Expected return on plan assets	268	11	279		279
Employee contributions	0	1	1	(1)	-
Employer contributions	25	4	29		29
Actuarial and other gains*	528	16	544	(373)	171
Benefit payments	(192)	(3)	(195)	195	-
Fair value of plan assets, end of year	4,622	253	4,875		4,875
Present value of benefit obligation, end of year				(5,418)	(5,418)
Economic basis deficit					(543)

*Including £115 million credit for past service costs as described above.

7. IAS 19 basis financial position as consolidated

The IAS 19 basis net pensions deficit can be summarised as follows:

	2006 £m	2005 £m	2004 £m
Fair value of plan assets, end of year	4,988	4,622	4,092
Present value of funded benefit obligation	(5,023)	(5,228)	(4,777)
Funded status	(35)	(606)	(685)
Present value of unfunded obligations (M&G scheme)*	(187)	(190)	(140)
Provision recognised in the balance sheet	(222)	(796)	(825)

*The M&G pension scheme assets are invested in Prudential insurance policies. For IFRS accounting purposes, the M&G scheme is in effect unfunded. Please see above for more details.

	2006 £m	2005 £m
Components of net periodic pension cost
Current service cost	(69)	(65)
Interest cost	(255)	(257)
Expected return on assets – economic basis	295	279
Less: expected return on investments of scheme assets in Prudential insurance policies	(16)	(11)
Expected return on assets – IAS 19 basis**	279	268
Pension cost charge (as referred to in note I1(a))	(45)	(54)
Actuarial gains – economic basis	485	171
Less: actuarial gains on investments of scheme assets in Prudential insurance policies	(16)	(16)
Actuarial gains – IAS 19 basis (as referred to in note I1(a))	469	155
Net periodic pension credit (included within acquisition and other operating expenditure in the income statement)	424	101

**In determining the expected return on plan assets for 2006, the 6.1 per cent rate shown above has been applied to the opening assets.

The long-term expected rate of return has been taken to be the weighted average (by market value) of the long-term expected rates of return on each major asset class shown below:

	2006			2005			2004
	£m	%		£m	%		£m	%
Plan assets (IAS 19 basis)
Equity	1,432	29		2,376	51		2,516	61
Bonds	2,185	44		1,593	35		993	24
Properties	621	12		575	12		520	13
Cash	750	15		78	2		63	2
Total value of assets	4,988	100		4,622	100		4,092	100

	2006 %	2005 %
Long-term expected rate of return
Equity	7.5	7.1
Bonds	4.8	4.5
Properties	6.8	6.4
Cash	5.0	4.5
Weighted average long-term expected rate of return	5.9	6.1

The expected rates of return have been determined by reference to long-term expectations, the carrying value of the assets and equity and other market conditions at the balance sheet date.

The actual return on plan assets was £419 million (2005: £796 million) on an IAS 19 basis.

None of the scheme assets included shares in Prudential plc or property occupied by the Prudential Group.

	2006 £m	2005 £m	2004 £m
Fair value of plan assets, end of year (IAS 19 basis)	4,988	4,622	4,092
Present value of the benefit obligation, end of year	(5,210)	(5,418)	(4,917)
Plan assets in deficit of benefit obligation	(222)	(796)	(825)
Experience adjustments on plan liabilities	18	1	(17)
Percentage of plan liabilities at 31 December	(0.35)%	(0.02)%	0.35%
Experience adjustments on plan assets (IAS 19 basis)	140	527	112
Percentage of plan assets at 31 December	2.81%	11.42%	2.74%

Total employer contributions expected to be paid into the Group defined benefit schemes for the year ending 31 December 2007 amounts to £93 million (2006: £85 million).

8. Sensitivity of PSPS financial position to key variables

The table below shows the sensitivity of the PSPS liabilities at 31 December 2006 of £4,607 million to changes in discount rates, inflation rates and mortality assumptions.

Assumption	Change in assumption		Impact on scheme liabilities on IAS 19 basis
Discount rate	Decrease by 0.2% from 5.2% to 5.0%		Increase scheme liabilities by 3.6%
Discount rate	Increase by 0.2% from 5.2% to 5.4%		Decrease scheme liabilities by 3.4%
Rate of inflation	Decrease by 0.2% from 3.0% to 2.8% with consequent reduction in salary increases		Decrease scheme liabilities by 1.3%
Mortality rates	Reduce rates from 100% of table to 95%		Increase liabilities by 1.2%

9. Transfer value of PSPS scheme

At 31 December 2006, it is estimated that the assets of the scheme are broadly sufficient to cover the liabilities of PSPS on a ‘buyout’ basis including an allowance for expenses. The ‘buyout’ basis refers to a basis that might apply in the circumstance of a transfer to another appropriate financial institution. In making this assessment it has been assumed that a more conservative investment strategy applies together with a more prudent allowance for future mortality improvements and no allowance for discretionary pension increases.

(ii) Other pension plans

The Group operates various defined contribution pension schemes including schemes in Jackson, Egg and Asia. As noted earlier, the cost of the Group’s contributions to these schemes in 2006 was £27 million (2005: £23 million).

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I2: Share-based payments

(a) Relating to Prudential plc shares

The Group maintains 10 main share award and share option plans relating to Prudential plc shares, which are described below.

In the year ended 31 December 2006, two new incentive plans were created and approved by shareholders at the Annual General Meeeting. The Group Performance Share Plan (GPSP) and the Business Unit Performance Plan (BUPP) were established and directors were authorised to implement these schemes in the UK and other countries in which Prudential operates.

The GPSP is the new incentive plan in which all executive directors and other senior executives within the Group can participate. This scheme was established as a replacement for the Restricted Share Plan (RSP) under which no further awards could be made after March 2006. Awards are granted either in the form of a nil cost option, conditional right over shares, or such other form that shall confer to the participant an equivalent economic benefit, with a vesting period of three years. The performance condition for the initial awards was on the basis that Total Shareholder Return (TSR) outperformed an index comprising of peer companies. This approach is more robust than a rank-based approach and ensures that maximum vesting is only achieved if the Company outperforms the average comparator performance by a significant margin. Outperformance would be measured on a compound basis and vesting of the awards between each performance point is on a straight-line sliding scale basis. Participants would be entitled to the value of reinvested dividends that would have accrued on the shares that vest.

The RSP was, until March 2006, the Group’s long-term incentive plan for executive directors and other senior executives designed to provide rewards linked to shareholder return. Each year participants were granted a conditional option to receive a number of shares. There was a deferment period of three years at the end of which the award vested to an extent that depended on the performance of the Group’s shares including notional reinvested dividends and on the Group’s underlying financial performance. After vesting, the award may be exercised at zero cost at any time, subject to closed period rules, in the balance of a 10-year period. Shares are purchased in the open market by a trust for the benefit of qualifying employees. Currently, the trust holds at least the maximum number of shares conditionally awarded and not yet forfeited or exercised. The RSP replaced the Executive Share Option Scheme in 1995 and all options under this prior plan had been exercised at 31 December 2005.

No rights were granted in the RSP if the Company’s TSR performance as ranked against the comparator group is below 50th percentile. For performance at 50th percentile, an award of 25 per cent of the maximum award is made. The maximum grant is made only if the TSR ranking of the Company is 20th percentile or above. Between these points, the size of the grant made is calculated on a straight-line sliding scale. This performance measure was chosen when the RSP was introduced as it reflected a combination of market practice, an assessment of Prudential’s main competitors and the focus of UK investors at that time. In normal circumstances, directors may take up their right to receive shares at any time during the following seven years.

The BUPP is an incentive plan created to provide a common framework under which awards would be made to the Chief Executives of Prudential UK & Europe insurance operations, Jackson and Prudential Corporation Asia, being a replacement to the existing incentive plans for these individuals. The plan is an incentive to promote ownership and encourage accountability for sustained long-term regional performance. Awards under this plan would be based on growth in Shareholder Capital Value on the European Embedded Value (EEV) basis with performance measured over three years. Upon vesting, half of the awards would be released as shares and the other half would be released in cash. Participants are entitled to receive the value of reinvested dividends over the performance period for those shares that vest. The growth parameters for the awards would be relevant to each region and vesting of the awards between each performance point is on a straight-line sliding scale basis.

The Savings-Related Share Option Scheme is designed to foster share ownership among UK and certain non-UK employees. Permanent employees are eligible for this plan if they have been employed by the Group for the previous six months. At the outset, participants choose an option period (three, five or seven years, or a combination of these periods) and the amount of monthly contributions to be made from their earnings during the option period, which determines the number of options granted. The option price is fixed at the start and is based on a discount of 20 per cent to the market price. Participants may exercise their options within six months of the end of the option period. If options are not exercised, participants are entitled to receive a refund of their cash contributions plus interest.

The Prudential International Savings-Related Share Option Scheme operates on a similar basis to the UK Savings-Related Share Option Scheme, for employees in Hong Kong, Malaysia, Singapore, Taiwan, India and Korea.

The International Savings-Related Share Option Scheme for Non-Employees also operates on a similar basis to the UK Savings-Related Share Option Scheme, for agents in Hong Kong.

No options may be granted under the three savings-related schemes described above if such grant would cause the number of shares which have been issued, or which remain issuable pursuant to options granted in the preceding 10 years under the scheme and other share option schemes operated by the Company, or which have been issued under any other share incentive scheme of the Company, to exceed 10 per cent of the Company’s issued ordinary share capital at the proposed date of grant.

The Prudential UK Share Incentive Plan (SIP) is also designed to foster share ownership amongst staff in designated UK businesses. It enables employees to buy shares on a tax efficient basis. For every four partnership shares bought, an additional matching share is granted, purchased in the open market. Participants have voting rights and are entitled to dividend payments which are reinvested in the SIP. Partnership shares may be withdrawn from the scheme at any time while matching shares may only be withdrawn five years after their award date.

Jackson operates a performance-related share award which, subject to the prior approval of the Jackson Remuneration Committee, may grant share awards to eligible employees in the form of a contingent right to receive shares or a conditional allocation of shares. These share awards have vesting periods of four years and are at nil cost to the employee. The employee does not have any beneficial ownership of the shares and, accordingly, does not have any right to dividends or voting rights attaching to the shares. Only issued shares purchased from the open market are used for the performance share award and there is no limit on the value of shares which may be granted to a participant in any year or over the life of the plan, which is usually no longer than 10 years.

The Annual Incentive Plan is designed so that a portion of any overall award may be made in the form of a deferred share award. A deferred share award is awarded to board members in respect of any overall annual incentive award above 50 per cent of salary, and will represent the element of the bonus above 50 per cent of salary. The award is restricted for three years before it can be released, subject to close periods, to the participant who must not be under a period of notice at the time and must still be in employment of Prudential. The shares are held in the employee share trust and shares equivalent to dividends otherwise payable will accumulate up to the release date.

The Share Participation Plan was designed to encourage share ownership amongst senior executives and to provide rewards based upon various performance factors of the Group. Each year, participants were offered the choice of a cash award, a matching share award if cash or shares to the value of the cash award were lodged, or a combination of 50 per cent of each. Share awards vested after five years for executive directors of Prudential plc and three years (formerly five years) for all other eligible employees and were transferred to the participants at no additional cost. Ordinary shares for share awards were purchased in the open market by a trust, which held them during the vesting period for the benefit of qualifying employees. At 31 December 2006, all outstanding shares in this plan have been paid for by employees and are registered in the names of the participants. No new shares have been granted in this scheme since 1999.

In addition, there are other share awards which included the 1,000 Day Long Term Incentive Plan (LTIP) and other arrangements.

The 1,000 Day LTIP plan is a UK insurance operations performance-based plan in which the UK Remuneration Committee could, at any time up to 5 October 2005, select employees at its absolute discretion, for participation in the plan. The performance period was 1,000 days and, based on the final performance level being at, or above, the threshold level, the committee shall grant participants 10 per cent of the allocated award in 2005, 20 per cent in 2006 and the remaining 70 per cent in 2007. There are no beneficial interests, or any rights to dividends until such time as the awards are released, at nil cost, to participants.

The other arrangements relate to various awards that have been made without performance conditions to individual employees, typically in order to secure their appointment or ensure retention.

Movements in share options outstanding under the Group’s share-based compensation plans relating to Prudential plc shares during 2006 and 2005 were as follows:

Options outstanding (including conditional options)	2006			2005
	Number of options (millions)	Weighted average exercise price £		Number of options (millions)	Weighted average exercise price £
Beginning of year:	17.2	2.23		18.4	2.21
Granted	7.7	2.96		3.7	1.83
Exercised	(5.1)	2.75		(1.1)	2.78
Forfeited	(1.2)	0.85		(1.9)	0.81
Expired	(3.1)	4.09		(1.9)	2.21
Adjustment in respect of Egg’s employees	1.0	3.64		–	–
End of year	16.5	2.47		17.2	2.23
Options immediately exercisable, end of year	0.2	3.56		0.4	3.30

The weighted average share price of Prudential plc for the year ended 31 December 2006 was £6.25 compared to £5.01 for the year ended 31 December 2005.

Movements in share awards outstanding under the Group’s share-based compensation plans relating to Prudential plc shares at 31 December 2006 and 2005 were as follows:

Awards outstanding	2006 Number of awards (millions)	2005 Number of awards (millions)
Beginning of year:	4.9	2.4
Granted	3.2	2.8
Exercised	(1.0)	(0.1)
Forfeited	(0.5)	(0.1)
Expired	–	(0.1)
End of year	6.6	4.9

The following table provides a summary of the range of exercise prices for Prudential plc options (including conditional options) outstanding at 31 December 2006.

Range of exercise prices	Outstanding				Exercisable
	Number outstanding (millions)	Weighted average remaining contractual life (years)	Weighted average exercise prices £		Number of options (millions)	Weighted average exercise price £
Between £0 and £1	5.7	2.23	2.23		18.4	2.21
Between £1 and £2	–	–	–		–	–
Between £2 and £3	3.2	2.3	2.66		0.0	2.66
Between £3 and £4	3.1	2.0	3.52		0.2	3.62
Between £4 and £5	3.8	3.6	4.60		–	–
Between £5 and £6	0.7	3.3	5.63		0.0	5.79
Between £6 and £7	0.0	0.6	6.41		0.0	6.34
Between £7 and £8	0.0	0.9	7.15		–	–
	16.5	4.8	2.47		0.2	3.56

The following table provides a summary of the range of exercise prices for Prudential plc options (including conditional options) outstanding at 31 December 2005.

Range of exercise prices	Outstanding				Exercisable
	Number outstanding (millions)	Weighted average remaining contractual life (years)	Weighted average exercise prices £		Number of options (millions)	Weighted average exercise price £
Between £0 and £1	4.7	8.3	–		–	–
Between £1 and £2	–	–	–		–	–
Between £2 and £3	8.0	1.9	2.66		–	–
Between £3 and £4	3.5	2.7	3.53		0.4	3.29
Between £4 and £5	0.8	3.9	4.07		–	–
Between £5 and £6	0.2	1.3	5.63		0.0	5.39
Between £6 and £7	0.0	1.1	6.56		0.0	6.66
Between £7 and £8	0.0	1.7	7.15		0.0	7.15
	17.2	3.9	2.23		0.4	3.30

The years shown above for weighted average remaining contractual life include the time period from end of vesting period to expiration of contract.

The weighted average fair values of Prudential plc options and awards granted during the period are as follows:

	2006 Weighted average fair value				2005 Weighted average fair value
	RSP and GPSP £	Other options £	Awards £		RSP £	Other options £	Awards £
	4.30	2.05	6.46		2.96	1.82	4.59

The fair value amounts relating to all options including conditional nil cost options above were determined using the Black-Scholes and the Monte Carlo option-pricing models using the following assumptions:

	2006			2005
	RSP and GPSP	Other options		RSP	Other options
Dividend yield (%)	2.64	2.64		3.19	3.19
Expected volatility (%)	25.48	34.32		42.93	40.38
Risk-free interest rate (%)	4.68	4.70		4.65	4.41
Expected option life (years)	3.00	3.42		3.00	3.62
Weighted average exercise price (£)	–	5.06		–	3.97
Weighted average share price (£)	6.80	6.51		5.01	5.12

Under IFRS, compensation costs for all share-based compensation plans are determined using the Black-Scholes model and the Monte Carlo model. Share options and awards are valued using the share price at the date of grant. The compensation costs for all awards and options are recognised in net income over the plans’ respective vesting periods. The Group uses the Black-Scholes model to value all options other than the RSP and GPSP. For these options, the Group uses a Monte Carlo model in order to allow for the impact of the TSR performance conditions. These models are used to calculate fair values for share options and awards at the grant date based on the quoted market price of the stock at the measurement date, the amount, if any, that the employees are required to pay, the dividend yield, expected volatility, risk-free interest rates and exercise prices.

The expected volatility is measured as the standard deviation of expected share price returns based on statistical analysis of daily share prices over a period up to the grant date equal to the expected life of options. Risk-free interest rates are UK gilt rates with projections for three, five and seven year terms to match corresponding vesting periods. Dividend yield is determined as the average yield over the year of grant and expected dividends are not incorporated into the measurement of fair value. For the RSP, volatility and correlation of the comparator group with the Group are required. These assumptions are based on the TSR of the comparators over a period up to the grant date equal to the performance period. For grants in 2006, an average comparator volatility of 24 per cent and an average correlation of comparators of 19 per cent were used. In addition, for the GPSP, volatility and correlation between Prudential and an index constructed from a simple average of the TSR growth of 10 companies is required. For grants in 2006, an average index volatility and correlation of 14 per cent and 71 per cent respectively, were used.

When options are granted or awards made to employees, an estimate is made of what percentage is more than likely to vest, be forfeited, lapse or cancelled based on historical information. Based on these estimates, compensation expense to be accrued at that date is calculated and amortised over the vesting period. For early exercises of options or release of awards due to redundancy, death or resignation, the compensation expense is immediately recognised and for forfeitures due to employees leaving the Group, any previously recognised expense is reversed. However, if an employee loses their award because of the Group’s failure to meet the performance criteria, previously recognised expense is not reversed.

During the year, the Group granted share options to certain non-employee independent financial advisors. Those options were measured using the Black-Scholes option pricing model with assumptions consistent with those of other share options. These transactions were measured using an option model because the Group does not receive a separate and measurable benefit from those non-employees in exchange for the options granted. As such, the fair value of the options themselves is more readily determinable than the services received in return.

(b) Relating to Egg plc shares

In April 2006, Prudential became bound or entitled to acquire shares in Egg following the announcement of its intention in December 2005 to acquire the minority interests in Egg representing approximately 21.7 per cent of the existing issued share capital of Egg. As a consequence of this acquisition, employees of Egg that were participants of its SAYE schemes were requested to either rollover all or part of their options for equivalent options in Prudential shares or to take no action. Employees could adopt different courses of actions for options granted on different dates but may only adopt one course of action in respect of each grant of options. The rollover was based on employees receiving 0.2237 Prudential shares for each Egg share that was under option with total amount payable for the new Prudential shares being exactly the same as the total amount payable for the Egg shares.

In addition, all outstanding executive share options became exercisable and awards under the RSP were assessed against the performance conditions. None of the awards met the performance conditions and they have therefore lapsed in February 2006 following consideration of the performance measurement results by the Remuneration Committee. At 31 December 2006, SAYE options to acquire 135,003 Egg shares remains outstanding because certain employees chose not to take any action.

In 2005, the Group maintained three main share award and share option plans relating to Egg shares, which are described below.

Awards of shares were made under the RSP at no cost to eligible employees selected by the Remuneration Committee. All Egg’s directors and employees, including employees of its subsidiaries, were eligible to participate, subject to the discretion of the Remuneration Committee. It was, however, intended that participation would, in practice, be restricted to selected individuals in key positions. Employees within two years of their anticipated retirement date were not eligible to participate, except in circumstances which the Remuneration Committee considered to be exceptional.

Egg established a discretionary employee benefit trust, the Egg Employee Trust, by a trust deed dated 26 April 2000 between Egg and Mourant & Co. Trustees Limited. At 31 December 2005, the trust held 3.4 million ordinary shares with a market value of £4.2 million which were intended to be used principally for delivery of shares under the employee incentive plans. These shares with a nominal value of £1.7 million were purchased on the open market at a cost of £4.5 million.

Egg made the vesting of awards subject to the satisfaction of performance conditions from January 2004 onwards. Previously, the awards had been conditional on service completed. The arrangements for the distribution to employees of shares held in trust and for entitlement to dividend depended on the particulars of each award. Shares held in trust were conditionally gifted to employees. The costs of share awards were charged to the income statement evenly over the period of service for which awards were made for schemes granted after 7 November 2002.

Egg also operated a sharesave scheme, which was an Inland Revenue approved all-employee Save as You Earn scheme. Under this scheme, employees entered into either three or five year contracts, at the end of which time they would be entitled to exercise their options and purchase shares at an exercise price fixed at a 20 per cent discount to the share price at the date of grant. Employees had six months after the contract matured in which to exercise the options. These options continued in force until their normal maturity dates.

Analysis of the movements in the number of shares and weighted average exercise price (with the exception of the Egg RSP where the exercise price is £nil) of options are set out below:

Egg RSP awards made prior to 7 November 2002.

	Number (millions)
	2006	2005
Outstanding at beginning of year	–	0.8
Forfeited	–	(0.7)
Exercised	–	(0.1)
Outstanding and exercisable at the end of year	–	0.0

Egg RSP awards made after 7 November 2002.

	Number (millions)
	2006	2005
Outstanding at beginning of year	6.1	6.2
Granted	–	1.7
Forfeited	(2.2)	(1.5)
Exercised	–	(0.3)
Expired	(3.9)	–
Outstanding and exercisable at the end of year	–	6.1

Egg sharesave scheme awards made prior to 7 November 2002.

	3 Year Employee Sharesave Scheme						5 Year Employee Sharesave Scheme
	Number (millions)			Weighted average exercise price £			Number (millions)			Weighted average exercise price £
	2006	2005		2006	2005		2006	2005		2006	2005
Outstanding at beginning of year	0.5	0.7		1.15	1.16		0.3	0.4		1.20	1.20
Forfeited	(0.0)	(0.2)		1.15	1.20		(0.0)	(0.1)		1.30	1.19
Exercised	(0.2)	0.0		1.15	1.15		(0.3)	–		1.20	–
Transferred to Prudential SAYE scheme	(0.3)	–		1.15	–		–	–		–	–
Outstanding and exercisable at the end of year	(0.3)	0.5		1.15	–		–	(0.3)		1.24	1.20

Egg sharesave scheme awards made after 7 November 2002.

	3 Year Employee Sharesave Scheme						5 Year Employee Sharesave Scheme
	Number (millions)			Weighted average exercise price £			Number (millions)			Weighted average exercise price £
	2006	2005		2006	2005		2006	2005		2006	2005
Outstanding at beginning of year	3.2	3.0		0.86	0.85		0.9	1.0		0.83	0.84
Granted	–	0.9		–	0.86		–	0.1		–	0.86
Forfeited	(0.3)	(0.7)		0.85	0.87		(0.0)	(0.2)		1.30	0.88
Exercised	(0.0)	0.0		0.80	0.80		–	–		–	–
Transferred to Prudential SAYE scheme	(2.8)	–		0.85	–		(0.9)	–		0.83	–
Outstanding and exercisable at the end of year	0.1	3.2		0.88	0.86		–	0.9		0.94	0.83

Egg share option scheme awards made prior to 7 November 2002.

	Number (millions)			Weighted average exercise price £
	2006	2005		2006	2005
Outstanding at beginning of year	9.3	11.5		1.42	1.42
Forfeited	(2.1)	(2.2)		1.52	1.43
Exercised	(7.2)	–		1.39	–
Outstanding and exercisable at the end of year	–	9.3		–	1.42

The weighted average share price of Egg up to the date of delisting was 127 pence compared with 106 pence at 31 December 2005.

The exercise prices and the weighted average remaining contractual life of the number of options outstanding at the year end are as follows:

	2006						2005
	Exercise price £		Number of options (millions)		Weighted average remaining contractual life (years)		Exercise price £		Number of options (millions)		Weighted average remaining contractual life (years)
Restricted share plan
Pre 2003 grant	–		–		–		–		–		–
2003 grant	–		–		–		–		2.8		0.2
2004 grant	–		–		–		–		2.0		1.6
2005 grant	–		–		–		–		1.2		2.2
3 Year Sharesave Scheme
2001 grant	–		–		–		1.30		–		–
2002 grant	–		–		–		1.15		0.4		–
2003 grant	1.17		0.0		–		1.17		0.3		0.9
2004 grant	0.80		0.1		0.9		0.80		1.9		1.9
2005 grant	0.86		0.0		1.9		0.86		0.9		2.9
5 Year Sharesave Scheme
2001 grant	1.30		0.0		–		1.30		0.1		0.9
2002 grant	1.15		0.0		0.9		1.15		0.2		1.9
2003 grant	1.17		0.0		1.9		1.17		0.1		2.9
2004 grant	0.80		0.0		2.9		0.80		0.7		3.9
2005 grant	0.86		0.0		3.9		0.86		0.2		4.9
Share option schemes
Pre 2003 grant	1.42		–		–		1.42		9.3		–

The fair value of the Egg RSP scheme at the date of grant was calculated using a Present Economic Value (binomial) model. The fair values of the sharesave schemes at the date of grant were determined using a Black-Scholes model.

In the year ended 31 December 2006, no options were granted on Egg plc shares.

The significant assumptions and inputs used to estimate the fair value of the options granted in 2005 are as follows:

	2005
	RSP	3 Year Sharesave	5 Year Sharesave
Share price (£)	1.09	1.03	1.03
Exercise price (£)	–	0.86	0.86
Risk-free interest rate (%) (note i)	–	4.14	4.14
Expected life (years)	3	3	5
Expected volatility (%) (note ii)	40	40	40
Dividend yield (%)	–	–	–
Share price volatility of comparator group (%) (note iii)	20	–	–
Fair value of option (£)	1.91	0.41	0.50

(c) Total share-based payment expense

Total expense recognised in the year in the consolidated financial statements related to share-based compensation is as follows:

	2006 £m	2005 £m
Share-based compensation expense	22	19
Amount accounted for as equity-settled	14	15
Carrying value at 31 December of liabilities arising from share-based payment transactions	18	10
Intrinsic value of above liabilities for which rights had vested at 31 December	3	1

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I3: Key management remuneration

Key management constitutes the directors of Prudential plc as they have authority and responsibility for planning, directing and controlling the activities of the Group.

Total key management remuneration amounts to £13,524,000 (2005: £13,688,000). This comprises salaries and short-term benefits of £8,927,000 (2005: £8,087,000), post-employment benefits of £1,032,000 (2005: £1,020,000), termination benefits of £291,000 (2005: £1,600,000) and share-based payments of £3,286,000 (2005: £2,969,000).

Post-employment benefits comprise the change in the transfer value of the accrued benefit relating to directors’ defined benefit pension schemes in the year and the total contributions made to directors’ other pension arrangements.

The share-based payments charge is the sum of £1,880,000 (2005: £1,842,000), which is determined in accordance with IFRS 2, ‘Share- Based Payments’ (see note I2) and £1,406,000 (2005: £1,127,000) of deferred share awards.

Total key management remuneration includes total directors’ emoluments of £11,084,000 as shown in the directors’ remuneration re