ALEX BRUMMER: Legal & General bosses shift the blame over LDI

Legal & General has long regarded itself as a cut above other players in insurance and pensions.

So the testimony by chairman John Kingman and chief executive Nigel Wilson on the group’s exposures to liability-driven investments (LDIs), the lightly regulated, highly leveraged strategy at the core of the Bank of England’s rescue last month, has been keenly awaited.

After all, when companies entrusted future management of the pensions of more than 1m citizens to L&G, they could not have expected it would expose them to complex derivative strategies beyond the comprehension of ordinary mortals.

Thanks to the Bank, no one was badly hurt by the mayhem in the gilts market triggered by the mini-Budget.

And as L&G is often fond of telling people, it has a wall of cash coming in every day from savers, which means it is able to deal with contingencies.

But one can’t help feeling that in their responses to a Lords select committee, Kingman and Wilson engaged in buck passing.

Former mandarin Kingman, the author of an excoriating report on the failures of audit, argued that no one would have regarded it as a plausible scenario that the Government ‘would create such extraordinary instability’ in two trading days.

But hang on a moment. The Bank of England had warned of the dangers potentially associated with LDIs back in 2018 and called for stiffer regulation. 

As a huge player in pensions, one might have expected L&G to have more carefully monitored the risks. The big lesson from the financial crisis of 2007-08 was that highly leveraged products can explode at any time.

The Liz Truss/Kwasi Kwarteng dash for growth, with its unfunded tax cuts, was badly judged.

But so was L&G’s decision to embrace LDIs so warmly. Insurers, pension funds and banks are encouraged to hold gilts (government bonds) because they are the safest instrument around. Exposing them to the casino economy is unconscionable.

Aveva alert

At a moment last month when all eyes in Britain were focused on the political fall-out from the botched mini-Budget, the nation’s head of cyber-security, Jeremy Fleming, issued an alert to the West about China. 

The GCHQ chief cautioned that Beijing is using its ‘economic and technological clout to clamp down at home and exert control abroad’. He asserted that China was seeking to gain advantage by shaping the world’s technology systems.

Keeping Britain safe from technology transfer and the shipment of intellectual property was among the main factors behind the backing by the Boris Johnson government for the National Security and Investment Act, matching a similar process in the US. 

In France, matters are more direct with Paris declaring yoghurt maker Danone a strategic industry.

French electrical giant Schneider thinks it is in order for it to acquire the minority in industrial software concern Aveva. But Paris would not look kindly on a similar investment in the opposite direction.

Schneider argues that its proposed takeover of near £10billion Aveva is no threat to national security because its joint venture works in China for Chinese customers and exports very little. 

Would Fleming, or even the French security services, be so complacent about the risks?

Schneider’s website declares: ‘We drive digital transformation by integrating world leading processes and energy technologies.’

It is hard to think, given its joint ventures or more direct operations in China, that Aveva software could be ring-fenced. Schneider’s local executives make no secret of the fact that its local operations are driven by automation and advanced technology.

It is looking increasingly possible that minority investors in Aveva will tell its dominant shareholder Schneider to take a hike.

But even if it wins the hearts and minds of the minority – generally it is only a haggle about price – there are solid strategic reasons to block an unwanted transaction.

Price guide

The idea that inflation is a home-grown illness, as put about by Labour’s front bench, needs correction. 

Data from the Office for National Statistics shows that across a universe of 29 advanced economies, 69 per cent are suffering from ‘high’ or ‘very high’ prices. 

Some 79 per cent had CPI rates above 6 per cent in September caused by spikes in energy prices.

British exceptionalism is a myth.