Profit statements

LDI crisis will hit L&G’s DB revenues and profits by £10m

Legal & General has revealed that its defined benefit revenue and profit will be hit by around £10m in its full year 2022 results.

DB plans scrambled to find cash following September’s ‘mini’ budget, which promised deep unfunded tax cuts and precipitated a deterioration in markets.

According to the Pensions Regulator, around 60% of schemes in the UK have invested in liability-driven investments.

The article continues after the announcement

Gilt yields soared and collateral calls poured in for schemes. The Bank of England launched a 13-day £13.9 billion bond-buying intervention in a bid to stabilize prices.

UK LDI is expected to account for around 2% of L&G Group divisional operating profits for 2022, in line with the previous year. L&G earns, on average, a 2-4 basis point fee margin on LDI assets under management.

“The extreme volatility in the UK gilt market following the ‘mini’ budget has highlighted the need for technical changes to ensure the smooth functioning of both LDI and the government’s financing of its debt,” said L&G in a commercial update.

“Clients who have implemented LDI have now significantly increased their collateralization levels. In addition, LDI providers are working closely with banks to improve and further diversify sources of collateral. »

L&G said the September and October events demonstrated the value of holding additional assets with their LDI provider, which it said would make it easier for them to access liquidity.

“We have seen positive flows to LDI during 2022,” he continued.

“However, DB Stream revenue has declined as higher fee products have been sold to meet warranty claims. As a result, we expect DB Stream revenue and annual profit to decline by around £10 million in 2022.”

The insurer welcomed the government’s Solvency II reforms announced in its autumn statement, which will lead to a 65% reduction in the risk margin for long-term life insurance business.

The Treasury hopes this will free up substantial capital, removing a hurdle to lower commodity prices and higher annuity yields, while reducing volatility on life insurers’ balance sheets.

“We believe that the proposals […] represent positive progress and will allow us greater flexibility to make appropriate investments,” L&G said, adding that these include increasing its ability to “develop new infrastructure, contribute to the UK government’s leveling program and support positive climate outcomes”.

Alex Janiaud is associate editor of FTAdviser’s sister publication, Pensions Expert