Legal & General forced to reassure investors after pension chaos

Legal & General was forced to reassure shareholders about its financial health after market turmoil wreaked havoc in the pensions industry.

The FTSE 100 savings and insurance giant is one of the biggest providers of so-called liability-driven investment (LDI) strategies.

These complex arrangements allow final-salary pension funds to help meet future payments to workers in retirement. 

But chaos in the bond market, sparked by Chancellor Kwasi Kwarteng’s mini-Budget, threw LDIs into disarray.

That forced the Bank of England to intervene with a pledge to buy up to £5billion of long-dated gilts a day for 13 days in a bid to restore order.

The move stabilised the markets to such an extent that the Bank has only spent £3.7billion out of a possible £25billion so far buying gilts, including zero purchases yesterday.

In its own update yesterday, L&G assured its shareholders that recent volatility ‘has limited economic impact on our businesses’. 

While the firm said its pension fund clients were facing ‘challenges’, it added that L&G itself was merely an agent in LDI agreements and had ‘no balance sheet exposure’.

Chief executive Nigel Wilson said: ‘Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for financial year 2022.’

L&G shares, which fell 17 per cent in the days after the mini-Budget, rose 5.9 per cent, or 13.1p, to 235p as the update soothed investor fears. 

But analysts at Jefferies added that the ‘biggest risk for L&G is that this crisis has discredited the firm’s risk management abilities’.

LDIs are used by final salary pension funds covering millions of savers to ‘hedge’ against the impact of interest rates and inflation. 

But they were built with layers of debt using gilts as collateral, creating a ‘time bomb’ that threatened to explode last week when the value of these bonds plunged in the wake of the mini-budget.

This forced the pension funds to stump up more collateral, plunging many into crisis and forcing the Bank to act. L&G said it ‘helped to alleviate the pressure on our clients’.

Blackrock, the US investment giant which is another of the UK’s largest LDI providers, was forced to post a statement on Twitter last week in which it said it was ‘setting the record straight’ on LDIs.

It was up to pension funds and their consultants to ‘determine their own objectives and investment mix and therefore the amount of exposure to LDI strategies’. 

Asset managers like Blackrock and L&G were simply there to ‘advise on how to structure and implement those strategies’, it said.