Legal & General chiefs said no one could have predicted the “extraordinary instability” that rocked pension funds in the wake of Liz Truss’s ’mini-budget’ today, as they pointed the finger squarely at the government for the scale of the crisis.
Speaking at the House of Lords industry and regulators committee, L&G chair Sir John Kingman and chief executive Sir Nigel Wilson defended the firm’s risk management processes but admitted that its modelling had never accounted for the “degree of stress there was in the market”.
Pension funds deploying debt-fuelled liability-driven investment (LDI) strategies, which are linked to government bonds, were pushed to the brink of a liquidity crisis in the wake of the mini-budget as concerns grew over the viability of lending to the government.
Kingman insisted today that no one in the market could have predicted the scale of volatility, however.
“No one involved in this – the regulators, the central bank, the government, the advisers, the funds, the sponsors or us – believed that it was a plausible scenario that the government would do something that would create such extraordinary instability in the market in two trading days,” Kingman said.
Shares in L&G, one of the biggest providers of LDI strategies, plunged beyond 22 per cent in the two weeks following the mini-budget before recovering to trade at near parity now.
Firms rolling out LDI strategies Regulators and firms have been looking to sell off assets and boost their liquidity in case they are rocked by similar crises in future.
L&G’s chief Sir Nigel Wilson admitted the scale of the volatility had caught the firm “by surprise” and it would now account for such extreme swings in the market within its modelling.
The comments come after the firm looked to soothe investor fears last week, telling the market the “extreme volatility” following the mini-Budget “highlighted the need for technical changes to ensure the smooth functioning of both LDI and the government’s financing of its debt.”
Questions have been swirling in the City over the amount of leverage used by fund managers and how the strategies were allowed to proliferate under the eyes of regulators.
The Pensions Regulator and Financial Conduct Authority are looking to tighten their oversight of the space and were quizzed by MPs over how the strategies were allowed to proliferate.
FCA chief Nikhil Rathi told MPs last week the regulator had simiarlyl been caught unprepared by the crisis.
“I don’t think that the particular scenario of a 250 basis point move in a space of five days in index-linked gilts, which has just never happened at any major [time] in our history, that particular risk wasn’t tested for,” he said.