Legal & General has placed responsibility for the market turmoil that triggered the autumn liquidity crisis firmly at the feet of the government, while adding its support to calls for the regulation of investment consultants.
Appearing before the Industry and Regulators Committee on November 22, L&G chair Sir John Kingman and chief executive Sir Nigel Wilson told members of the House of Lords that it could not have foreseen the market consequences of the September “mini” Budget and had not factored such a scenario into its stress-testing.
L&G’s representatives also backed calls for the regulation of investment consultants, after Financial Conduct Authority chief executive Nikhil Rathi expressed the same view before the committee on November 16.
Kingman and Wilson were interrogated on schemes’ abilities to respond to the liquidity crisis, which was triggered by a sharp rise in gilt yields following the “mini” Budget. Collateral calls poured in for schemes, and the Bank of England launched a 13-day, £13.9bn bond-buying intervention in a bid to stabilise prices, having previously announced a gilt-selling package on September 22.
Kingman told the committee that “the ability of pension funds to post wider forms of collateral in conditions of liquidity stress” will need examining, adding that “it would have greatly eased the situation we’ve just been through”.
They were also asked why L&G’s stress-testing had not foreseen autumn’s market turbulence.
“Wrongly, nobody anticipated that the British government would choose to create such extraordinary instability in its own sovereign debt market,” Kingman replied.
L&G did not stress-test for ‘mini’ Budget outcome
Markets have since stabilised and inquiries have begun into schemes’ handling of October’s turmoil.
Rathi appeared before the Industry and Regulators Committee alongside the Pensions Regulator’s chief executive, Charles Counsell.
The Work and Pensions Committee will also hear from industry bodies and experts, including the Pensions and Lifetime Savings Association, on November 23.
L&G is one of the main liability-driven investment providers for UK schemes, alongside BlackRock, Insight, Schroders and Columbia Threadneedle.
The group’s representatives defended pension schemes’ use of LDI, citing research that suggests such investment has created £150bn in value for funds. The concept of LDI was created in 2001.
Kingman and Wilson were asked whether L&G would change how it managed leverage in LDI funds.
L&G’s chair said the most important lesson from the crisis would involve understanding how extreme a scenario LDI vehicles should be insulated from. “The present situation is that LDI vehicles are extremely well-insulated,” he said.
“There will then be a judgment made about where […] you want to put yourself on a spectrum between where we used to be [and] where we currently are.”
“I think it’s extraordinarily unlikely that anyone would advocate going back simply to where we were,” Kingman continued, adding that increases to protection would drive up costs for schemes and their sponsors.
