Forum Key Insights

UK pension funds – LDI exposure and gilt market developments

  • Credit
  • Financials
  • Europe

Third Bridge Forum spoke to an executive at Legal & General Group plc to discuss liability-driven investment (LDI), pension fund liquidity risks and the likelihood of future runs on the gilt market. Here are the need-to-know insights from that Interview:

  • The specialist said the LDI crisis was a liquidity crisis rather than insolvency. They told us inversely, as yields were increasing, some solvency positions were also improving. 
  • We heard most funds were not fully hedged, so as yields rose, liability schemes fell faster than the value of assets.
  • LDI strategies had been improving the funding positions of pension funds long before the crisis, according to the specialist, but funds have now recognised they may have been overexposed.

The chance of something nasty happening, and who knows what it might be, and causing yields to spike again is quite high.”

  • The specialist believes most funds have deleveraged already, with leverage moving from 4x to 2x and collateral commitments shifting from 200bps to around 350bps. 
  • The specialist thinks there should be no structural risk to pension plans.
  • In the Interview the specialist said the Bank of England’s behaviour has bolstered its credibility in testing times and that an overnight facility makes sense.
  • Overall, the specialist believes there is still a high risk of a similar scenario materialising again due to the amount of economic uncertainty.
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The information used in compiling this document has been obtained by Third Bridge from experts participating in Forum Interviews. Third Bridge does not warrant the accuracy of the information and has not independently verified it. It should not be regarded as a trade recommendation or form the basis of any investment decision.

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