RE: tec/trek18 Nov 2022 10:43
trekmadone ldi taken from igen rns
LDI: a liquidity challenge in the UK prompted by a rapid increase in interest rates
Legal & General Investment Management (LGIM) has for many years supported pension funds with a variety of solutions, including LDI, and continues to do so.[3] We earn on average 2-4bps fee margin on LDI assets under management. We implement LDI business for clients in the UK, US and Europe. UK LDI is expected to be around c2% of our Group divisional operating profit in 2022 as it was in 2021.[4]
LDI enables pension funds to match movements in pension assets with liabilities, whilst freeing up capital to invest in growth assets. LDI has played a critical role in helping Defined Benefit (DB) pension funds to reduce their pension deficits. As the UK Pensions Regulator noted recently: "Over the past twenty years, as long-term interest rates fell to historically low levels and through market events seen through the COVID-19 pandemic, LDI has meant that the assets in DB schemes increased. During that period, LDI also played a significant role in helping to manage the affordability of DB schemes for employers."[5]
LGIM has worked closely with its LDI clients to support them through the recent period of severe market volatility, which catalysed a sharp and extreme rise in interest rates. Interest rates had been increasing throughout 2022 in most major western markets. In the UK, between the beginning of the year and 16th September (just prior to the mini-Budget) 30-year gilt rates increased by 230 basis points. This had not caused significant disruption for UK LDI clients. However, in the week of and following the mini-Budget, 30-year gilt rates increased rapidly by a further 150 basis points before the Bank of England stepped in to provide support to the gilt market.[6] 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. This caused liquidity problems for some LDI clients who had assets available but could not access them in time to provide cash collateral.
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. Clients who have implemented LDI have now significantly increased collateralisation levels. In addition, LDI providers are working closely with banks to further enhance and diversify sources of collateral.
Recent events have highlighted to DB pension funds the value of holding additional scheme assets with their LDI provider, enabling easier access to liquidity. We are well positioned to benefit from any potential consolidation of pension scheme assets, given our range of investment capabilities. LGIM acts as an agent between our LDI clients, their trustees, advisers, and market counterparties (banks) and therefore has no
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