Legal & General estimates £10mn hit from UK pension fund liquidity crisis

Legal & General has detailed the impact of the pension fund liquidity crisis in September, estimating that its profits would be reduced by £10mn as clients sold higher-fee products to meet collateral calls.

Then-chancellor Kwasi Kwarteng’s “mini” Budget had unleashed turmoil in the gilt markets, forcing pension funds to sell assets to meet collateral calls from their so-called liability-driven investment strategies. L&G is one of the UK’s biggest providers of LDI products.

The FTSE 100 insurer said the “sharp and extreme increase in gilt yields” in the wake of the fiscal statement had materially increased the collateral required. “This caused liquidity problems for some LDI clients who had assets available but could not access them in time to provide cash collateral,” it added.

L&G said the “extreme volatility . . . has highlighted the need for technical changes to ensure the smooth functioning of both LDI and the government’s financing of its debts”, with clients increasing and diversifying their collateral, as well as holding additional scheme assets with their LDI provider.

The company said its own balance sheet was not exposed to the problems, adding that it had experienced positive flows into LDI funds this year. But it said revenue related to flows from defined benefit pension funds had declined as higher-fee products — such as multi-asset funds and fixed-income funds — were sold to meet collateral requests.

That will reduce revenue and profits in the business by about £10mn this year as a result. Rising interest rates have also reduced fixed-income and related assets at its fund management arm, affecting revenue.

However rising interest rates may provide better news for L&G’s annuity business by reducing the present value of pension schemes’ promises to members and leaving them in a better-funded position.

This increase in funding levels should mean that more schemes are able to participate in the bulk annuity market, in which an insurer agrees to take on their assets and liabilities. L&G said it had transacted or was in exclusive talks on £9.3bn of such deals globally, compared with the £7.2bn secured last year.

The insurer also welcomed the Solvency II reform in Thursday’s Autumn Statement. It said it anticipated that the reforms would be included in regulation going through parliament in the first half of 2023.

L&G said it expected the proposed reduction in the risk margin, a capital buffer, to add about 3 to 4 percentage points to its solvency ratio. It also expected that the share of UK-based assets backing its UK annuity portfolio would grow following the reforms. It had previously warned that prized investment risked being lost to the US if the post-Brexit Solvency II reforms were not sufficiently ambitious.

L&G’s shares were up 3 per cent in morning trading on Friday, outpacing the wider UK blue-chip index.