The U.K. pension fund liquidity crisis triggered by a since-withdrawn government budget in September will cost Legal & General Group an estimated £10 million ($12 million), it said in a trading statement filed Friday.
Liability-driven investment strategies provided to U.K. pension fund clients accounted for roughly 2% of Legal & General Investment Management's operating profit in 2021 and were expected to do the same in 2022, the firm said in the filing with the London Stock Exchange.
As gilt market volatility increased following the budget proposal, LGIM's LDI clients sold higher-fee products to meet collateral calls."This sharp and extreme increase in gilt yields, which materially increased the collateral required by banks from LDI funds, was more than twice the level seen over any week in the last 25 years," the filing said.
In addition to the expected £10 million hit to revenue and profits, "rising interest rates have reduced LGIM's assets under management in fixed income and solutions strategies, with a consequent reduction in revenue," the filing said.
As a result of the extreme volatility, LDI clients "have now significantly increased collateralisation levels. In addition, LDI providers are working closely with banks to further enhance and diversify sources of collateral," Legal & General said in the filing.
However, rising interest rates offer better news for Legal & General's pension risk transfer business. "We are on track to deliver another strong PRT result this year and a record year for our international PRT business," the filing said. To date, Legal & General Retirement Institutional has closed on or is in exclusive negotiations on £9.3 billion of global PRT business, with £7.1 billion of that in the U.K. and well ahead of 2021's £7.2 billion. The pipeline for 2023 "is the busiest we have seen," and is on track for a record year for international transactions," according to the filing.
Spokesmen for Legal & General declined to comment further.