, 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.
L&G said the Bank’s action had reduced interest rates, and lessened pressure on its clients.
The company said it had “no balance sheet exposure” to LDIs, as it acts as an agent between its clients and other counterparties in the market.
Sir Nigel Wilson, the Legal & General group chief executive, said: “Our balance sheet and liquidity position remain strong, and our businesses are highly cash generative. We continue to work closely with our customers to support them through this period of increased market volatility.”
L&G added that it holds “considerable buffers” over capital and liquidity requirements, enabling it to “withstand shocks like we have seen in the past few days”. It said it had a “wide array of tools available to manage collateral calls”.
The company said recent market volatility has had a “limited economic impact” on its businesses, and its expectations for full-year operating profit of about 8% and capital generation of £1.8bn were unchanged.
Legal & General’s shares rose 5% on Tuesday morning, but remained about 10% below the levels before Kwarteng’s mini-budget was delivered on 23 September.
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Now, let's delve into the information provided in the article about Legal & General (L&G), one of the UK's major pension and insurance firms:
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Market Volatility and Collateral Calls:
- L&G issued a trading update addressing the significant increase in market volatility in the second half of the year.
- Despite the volatility, L&G reassured investors that it did not face difficulties meeting collateral calls and was not forced to sell bonds or UK government debt (gilts).
- The reassurance comes after sudden interest rate rises affected L&G's pension fund clients.
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Pension Fund Sell-off and Collateral Management:
- L&G was one of the first pension fund managers to pass on collateral calls to its pension fund clients.
- The market turmoil following the chancellor's mini-budget led to a sell-off as asset prices, including UK government bonds (gilts), slumped.
- Rumors circulated about issues related to niche financial products, specifically liability-driven investing (LDIs), offered by investment banks to pension funds.
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Bank of England's Emergency Intervention:
- The pension fund sell-off was halted by the Bank of England's £65bn emergency intervention, which aimed to stabilize market conditions.
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Financial Products – Liability-Driven Investing (LDIs):
- LDIs are financial products offered by investment banks to pension funds.
- LDIs help pension funds manage or hedge their risks by offsetting liabilities and risks on their books.
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Glossary of Key Terms Explaining UK Economic Turmoil:
- The article provides a glossary of key terms related to the economic turmoil, including monetary policy, fiscal policy, budget deficit, government debt, government bonds (gilts), bond yields and prices, short- and long-term interest rates, quantitative easing and tightening, pension funds and the bond markets, margin calls, doom loop, and fiscal dominance.
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Legal & General's Position and Response:
- L&G emphasized its strong balance sheet and liquidity position, remaining highly cash generative.
- The company stated that it had "no balance sheet exposure" to LDIs and acted as an agent between clients and counterparties.
- L&G highlighted its considerable buffers over capital and liquidity requirements, enabling it to withstand shocks and manage collateral calls effectively.
- Despite market volatility, L&G maintained its expectations for full-year operating profit and capital generation.
In summary, Legal & General has navigated through market challenges, reassured investors, and highlighted its robust financial position amid increased volatility and the impact on pension funds.