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Legal & General, one of the UK’s biggest pensions and insurance firms, sought to reassure investors, days after pension fund customers were hit hard by rising interest rates. interest rates and market volatility.
In a trading update to the stock market, the company said that market volatility had increased significantly in the second half of the year, but that it had no trouble meeting its benchmark calls and that it had not ability to buy bonds with the British government. debt, also known as gilts.
L&G said it was working with its customers after “extreme interest rates” had risen at an “unprecedented pace”.
Legal & General was one of the first pension fund managers to issue an assurance call to its pension fund clients two days after the Chancellor’s small budget, which sent the market into shock, falling sharply to a record down and beat the British government bonds. As asset prices fall – including UK government bonds or shillings – more bonds are required to pay pension fund liabilities, prompting money to be released assets and raising funds in a short period of time.
After L&G’s move, news spread across the markets about problems with the use of private equity products offered by investment banks to pension funds that were trying to manage or solve their problems. Products known as liability-linked investments, or LDIs, help limit liabilities and risks to pension fund books.
This led to the sale of pension funds. This was prevented by a £65bn emergency intervention by the Bank of England, which helped calm the market.
Quick Guide
Glossary of key terms to explain Britain’s economic problems
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Monetary policy
The Bank of England’s role, since 1997, has been the legal role of hitting the government-set inflation rate – currently 2%.
Financial policy
The Treasury is responsible for fiscal policy, which includes taxation, public spending and the relationship between the two. ‘Fiscal easing’ means that plans for tax cuts are not matched by planned spending cuts.
Budget deficit
The gap between government spending and its tax revenues
Government debt
Total annual budget deficits – and less surpluses – over time.
Government restrictions
In the UK these are known as gilts, a way for the government to borrow money to finance its spending. The fact that governments are willing to pay investors means that the risk is low. Bonds mature for different periods, including one year, five years, 10 years and 30 years.
Bond yields and fees
Most bonds are issued at a fixed interest rate, and the yield is a return on the capital invested. When the Bank of England cuts interest rates, gilts return better and prices rise. However, when interest rates rise gilts become less attractive and prices fall. So when bond prices fall, bond yields rise, and vice versa.
Short term and long term interest rates
Short-term interest rates are set by the Bank of England’s MPC, which meets eight times a year. Long-term interest rates rise and fall based on fluctuations in bond yields, most notably yields on 10-year bonds. Long-term interest rates affect the cost of fixed-rate mortgages, mortgages and credit card debt.
Quantitative analysis and quantitative analysis
When the Bank of England buys bonds it is called quantitative easing (QE), because the Bank pays for the bonds it buys by creating electronic money, which it hopes will flow into the system. finance and the general economy. Quantitative amplification (QT) has the opposite effect. It reduces lending through the sale of assets.
Pension funds and bond markets
Pension funds are popular with bond investors because they are a risk-free way of securing payments to retirees over many years. Movements in bond prices are relatively mild, but pension funds are still taking out insurance – closed policies – as protection to reduce their exposure. A rapid decline in gold prices will make these hedges unsustainable.
Call margin
Selling on margin is where an investor or firm buys an asset at a discount and borrows money to cover the balance of the price. The upside of margin trading is that it offers bigger bets and higher returns when times are good. But investors need to be prepared to cover losses when times get tough. In times of stress they are sent to marginal calls, where they need to find additional support, very quickly.
Deadly circle
This is where the financial crisis begins to feed itself, because companies are forced to sell off their assets to meet additional calls. If pension funds are selling in a falling market, the result is lower milk prices, higher gold yields, higher losses and other additional calls.
Financial control
This is where the Bank of England is prevented from doing what it thinks is necessary to avoid inflation due to the large amount of money being held by the Treasury. There are two ways in which money can be controlled: it can lower interest rates at the bank, to reduce the government’s interest payments on its debt, or it can help cover the government’s debt by sell money.
Larry Elliott Economic editor
L&G said the Bank’s action has reduced interest rates, reducing pressure on its customers.
The company said it has “no balance sheet advertising” to LDIs, as it acts as an agent between its customers and other partners in the market.
Sir Nigel Wilson, Group Head of Legal & General, said: “Our financial and financial position remains strong and our business is very profitable. We will continue to work with our clients to support them in this period of increasing market.
L&G also said it had “significant reserves” in terms of capital and cash flow, which could “prevent shocks like we’ve seen in the past few days”. It said there are “a number of tools available to manage redundant calls”.
The company said the current market environment had a “minor economic impact” on its business, and its expectations for full-year operating profit of 8% and capital formation of £1.8bn were not met. different.
Shares in Legal & General rose as much as 5% on Tuesday morning, but remained around 10% below levels before Kwarteng’s low-budget filing on 23 September.
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