The head of the legal department, one of the biggest providers of responsibility-driven investment strategies, defends risk management, blaming former prime minister’s ‘mini’ budget for pension fund liquidity crisis in September Did.
answer questions about LDI crisis From the House of Lords’ Industry and Regulatory Committee, L&G’s chairman and chief executive defended the insurer’s modeling and use of leverage, but the FTSE 100 Group will closely monitor such ‘black swan’ events. I acknowledged the need.
“No regulator, central bank, government, adviser, fund, sponsor or any of us were involved in this,” said Sir John Kingman, Chairman of L&G. That’s what really happened here.”
According to L&G management, the biggest cause of the market panic was ex-Prime Minister Liz Truss’ drastic fiscal easing in her growth plans, which exacerbated market nervousness over the Bank of England’s plans to reduce gold coin inventories, leading to the government’s borrowing costs soared. .
Sir Nigel Wilson, chief executive of L&G, said he was “surprised” by how quickly bonds fell. “Our modeling did not take into account the degree of stress that exists in the market,” he added.
L&GModeling will now take such scenarios into account, he said, and the LDI strategy is now being executed more cautiously, with more “headroom” against a sharp rise in market rates. added.
Last week, L&G saw its profit £10m savings After a client sells certain funds to meet a collateral call. The company did not take any balance sheet risk in its LDI strategy, instead acting as an agent between the pension fund and the investment bank, thus avoiding further damage.
Commission member Baroness Sharon Bowles questioned the use of leverage in the LDI strategy, suggesting that it is effectively “the same as borrowing” and is not permitted under the law. Kingman said L&G’s “clear understanding is that his LDI product offered by us is .
He told the committee there are lessons to be learned more generally about the use of leverage and the collateral that pension funds are allowed to post.
The Committee also discussed the multiple regulators responsible for this area, with the Bank of England’s Prudential Regulator, Financial Conduct Regulator and Pensions Regulator all playing a role. Last week, FCA said to the same committee The scenario that unfolded following the ‘mini’ budget was not ‘right above the radar’.
“We need clarity on who will be the primary regulator for this particular segment of the pension industry,” Wilson said.
He suggested the PRA could take a closer look at defined benefit pension funds.
Companies discussing LDIs with pension funds are not currently regulated for investment advice. Wilson described the role of insurance companies as the “hired help” of advisers, and Kingman told the commission that, in his view, these firms should be kept within the scope of regulation.