Legal & General has said the “unprecedented speed” of recent interest rate increases has “caused challenges” for its pension fund clients.
In a trading update today (October 4), the financial services provider outlined the position of its UK-based liability driven investment (LDI) arm.
It said the Bank of England’s decision to buy long-dated gilts to restore orderly market conditions “helped to alleviate the pressure on our clients”.
L&G added that it is now “work[ing] closely” with pension fund clients to iron out the hedging levels in their portfolios.
The company also said that because Legal & General Investment Management - the brand its LDI business sits under - is an agent which acts between clients and market counterparties, there is “no balance sheet exposure”.
Pension funds holding LDI strategies were what prompted the Bank of England’s £65bn emergency bond-buying programme.
LDI is what underpins many of the UK’s defined benefit pension schemes. When gilts yields shot up following the chancellor’s mini-Budget, LDI-linked pension funds became vulnerable and struggled to meet collateral calls which maintain their hedges on interest rates.
One consultant told FTAdviser some of his colleagues were of the belief that everything nearly ended for LDI last week.
These pension schemes are now getting rid of stocks and bonds in favour of cash.
Elsewhere in L&G’s trading update, the firm said its annuity portfolio has not experienced any difficulty in meeting collateral calls. “We have not been forced sellers of gilts or bonds,” it said.
It also said it was benefiting from higher interest rates in other areas of the business, placing a demand on global pension risk transfers (PRT), adding £1.3bn to this business since the first half of the year.
"Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for financial year 2022,” said L&G’s group chief executive, Sir Nigel Wilson.
“Rising interest rates are having a positive impact on demand for PRT, and on our earnings per share and solvency coverage ratio.
“Our balance sheet and liquidity position remain strong, and our businesses are highly cash generative. We continue to work closely with our customers to support them through this period of increased market volatility.”
ruby.hinchliffe@ft.com
