Legal & General seeks to reassure investors amid pension fund volatility
Legal & General, one of the UK’s largest pension and insurance firms, has sought to reassure investors, days after its pension fund clients were hit by sudden interest rate rises and market volatility.
In a trading update to the stock market, the company said market volatility had increased significantly in the second half of the year, but it had not experienced any difficulties in meeting its collateral calls, and had not been a forced seller of bonds or UK government debt, known as gilts.
L&G said it was working closely with its clients after “recent extraordinary increases in interest rates” which had risen with “unprecedented speed”.
Legal & General was one of the first pension fund managers to pass on collateral calls to its pension fund clients two days after the chancellor’s mini-budget, which caused market turmoil, sending sterling tumbling to record lows and knocking UK government bonds. As asset prices slumped – including UK government bonds, or gilts – more collateral was required to offset the pension funds’ liabilities, forcing the funds to dump assets and raise cash at short notice.
After L&G’s move, rumours spread across the markets about problems centred on the use of niche financial products offered by investment banks to pension funds that are trying to manage or hedge their risks. The products are known as liability-driven investing, or LDIs, and help offset liabilities and risks on pension funds’ books.
This prompted a pension fund sell-off. This was only halted by the Bank of England’s £65bn emergency intervention, which helped to calm market conditions.
Monetary policy
The job of the Bank of England, which since 1997 has had the statutory task of hitting the inflation target set by the government –
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