Legal and General  

LDI crisis to hit L&G’s DB revenue and profit by £10mn

LDI crisis to hit L&G’s DB revenue and profit by £10mn

Legal & General has disclosed that its defined benefit business-linked revenues and profits will be hit by around £10mn in its full-year 2022 results.

DB schemes scrambled for liquidity in the aftermath of September’s “mini” Budget, which pledged extensive unfunded tax cuts and precipitated a deterioration in markets.

Around 60 per cent of schemes in the UK have invested in liability-driven investments, according to the Pensions Regulator.

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Gilt yields spiked and collateral calls poured in for schemes. The Bank of England launched a 13-day, £13.9bn bond-buying intervention in a bid to stabilise prices.

UK LDI is expected to account for around 2 per cent of L&G’s group divisional operating profits for 2022, which sits in line with the prior year. L&G earns, on average, a fee margin of 2 to 4 basis points on LDI assets under management.

“The extreme volatility in the UK gilt market following the ‘mini’ Budget has highlighted the need for technical changes to ensure the smooth functioning of both LDI and the government’s financing of its debt,” L&G said in a trading update. 

“Clients who have implemented LDI have now significantly increased collateralisation levels. In addition, LDI providers are working closely with banks to further enhance and diversify sources of collateral.”

L&G said that the events of September and October demonstrated the value of holding additional scheme assets with their LDI provider, which it said would grant them easier access to liquidity.

“We have experienced positive flows into LDI over the course of 2022,” it continued. 

“However, DB flow-related revenue has decreased as higher-fee products have been sold to meet collateral requests. We expect DB flow-related annual revenue and profits to reduce by around £10mn in 2022 as a result.” 

The insurer welcomed the government’s Solvency II reforms announced in its Autumn Statement, which will see a 65 per cent reduction in the risk margin for long-term life insurance business. 

The Treasury hopes that this will free up substantial amounts of capital, removing a barrier to lower product prices and higher annuity yields, while reducing the volatility of life insurers’ balance sheets. 

“We believe the proposals […] represent positive progress and will allow us greater flexibility to make appropriate investments,” L&G said, adding that these include increasing its ability to “develop new infrastructure, contribute to the UK government’s levelling-up agenda, and support positive climate outcomes”.

Alex Janiaud is deputy editor at FTAdviser's sister publication Pensions Expert