Sir Nigel Wilson and Sir John Kingman.

Q18 The Chair: Good morning, and welcome to the Industry and Regulators Committee. This is the second hearing on the events surrounding LDI. We are delighted to welcome today Sir John Kingman and Sir Nigel Wilson, respectively the chairman and the chief executive of Legal & General, which was one of the pioneers of LDI way back in the earlier 2000s and is now one of the biggest players in that market. We have the opportunity today to understand some of the issues from the inside.

I shall start by asking you about your process of risk management. Over the period of 20 years that LDI has been around, there have been several changes; a notable one was the level of gearing, along with the sorts of assets that can be bought through the borrowing mechanisms of repo. As a company, how have you managed that in order to satisfy yourselves that everything is as it should be and that the risks are properly understood, not just at Legal & General, where you have got a group of experts, but by your clients and those you work with?

Nigel, would you like to start us off? Take us through the journey of risk management. Before Nigel answers that, I should say for the record that Nigel and I worked together very happily for four or five years in the media industry, which proved to be a lot less exciting than the financial services industry.

Sir Nigel Wilson: We did not know that at the time. I will try to give the context of how LDI has evolved and how we think about the risks in the LDI business. As you rightly pointed out, it has been around for quite a long time. We initially started doing it in 2001. They are called liability-driven investments, and it is a recognition that pension funds need to be cognisant of their liabilities—that is, their capability to pay pensions to people. That is why there is an emphasis on liabilities as opposed to an asset-driven strategy, which can create a lot of volatility and risks around what assets people invest in.

We act as an agent in the LDI business, so there is no balance-sheet risk for us. We have deliberately set ourselves up as agents with no balance-sheets risk to us. There are various other people who hold balance-sheet risks—most importantly, the corporate sponsor. The sponsor has the obligation to pay pensions. We are very interested in making sure that the corporate sponsor recognises that they have to pay the pensions over the next 10, 20, 30, 40 years.

The other two really important sets of people in the corporate set-up are the trustees and their advisers and consultants. The advisers and consultants advise the trustees. These are large global firms such as Aon, Willis Towers Watson, PwC, Mercer and LCP. There are a bunch of these people who are very experienced at providing very sound advice to trustees, and the trustees are legally obligated to get advice from these consultants. So we make sure that they are all advised by proper people. About 99.7% of all our interactions with the corporate sponsor are via those professional advisers, who operate on a global basis, giving advice on LDI not just in the UK but outside it. We believe that we are risk minimising by getting really good advice given to trustees.

It is fair to say that our regulator recognises that over the last 20 to 25 years we have helped to deliver really good outcomes, even through the financial crisis, for corporates. They have managed to weather the storm. In fact, they are probably in the best place they have been in those 20 to 25 years, with many finding themselves in surplus after many years of being in deficit.

It is an important business to us but not a critical one. In terms of size, from a prospective point of view we make about 2% of our group operating profits from the LDI business. So this is not a massive money machine that we are operating for our benefit; it is a risk-managed business that is quite small from a profit point of view but very important for our clients from a strategic point of view.

We compete in a competitive market. Our major competitors in that market are BlackRock, which is the largest fund manager in the world, based in America; Insight, which is owned by Bank of New York Mellon, again from America; Columbia Threadneedle, also owned by an American firm; Ameriprise; and Schroders. So there is a good choice for trustees and advisers to work with in the field. It is not as if any of us has a monopoly position; there is a good amount of competition.

We will see some of the assets and liabilities of an individual firm, but we will not have a view of all the assets and liabilities of a particular corporate sponsor, only a percentage of them. Therefore, the management of the overall assets and liabilities of the corporate sponsor is provided by their advisers or consultants to the trustees. It is not provided by us. We are an agent, so we receive our instructions from the LDI consultants within the corporate. Again, from a risk-management point of view, these have worked very well for a long period of time—up to a few weeks ago, which I am sure we will talk about later, because we are really here to ask why it went wrong at that time.

During 2022, we have seen the risks in the whole financial services area in the UK go up because of inflation and interest rates moving. We have been very able in coping with that until the events of 22 and 23 September. On 22 September, the Bank of England announced that it was going to fire the gun and start selling gilts. This caused a little uptick in yields, a noticeable uptick of 20 basis points, but on 23 September the mini-Budget came, and it is fair to say, I think, that the mini-Budget caused all of us to reconsider how much risk there really was, not just in this area but in many parts of the economy.

From 24 September onwards, we saw rapid and, as Jon Cunliffe mentioned, unprecedented increases in the gilts market. We were left in a situation where the prices of gilts and the interest rates on them were moving faster than we had ever seen before. I am sure other people have explained this to you, but the movements were two, three, four and even up to 20 times the standard deviation, well outside any of the models that we had ever considered when we were looking at how much stress and how much risk we should consider in this particular area.

It was very much driven by the mini-Budget, in part because it was very inconsistent with the message that the Bank of England had been giving the previous day. The reputational risk of the UK was almost set on a different footing, because there was one message from the Bank of England on the 22nd and another from the Government on the 23rd.

None of the many calculations that we had used in all our stress-testing took into account the scenario that we faced on the 22nd, the 23rd and beyond, until the 28th when the Bank of England chose to intervene in the market because it was clear that the financial stability was not there. We stress-test our model every day, and for a very long period of time we never had a problem. The problem was caused by the mini-Budget, which caused the gilt market to move in an unprecedented way that we had never modelled before.

Again, as Jon Cunliffe said in his evidence to you, this was unprecedented for the Bank. We did not have a dialogue with any of our many regulators that this was a scenario that we should be modelling in our stress-testing, and we had never modelled that scenario in our stress-testing. I feel as though we have a very long track record of doing an amazing job for our customers over 20 years. This event caught us all by surprise, and our modelling had never taken into account the degree of stress that was in the market. I think the Bank of England did the right thing by stepping in on 28 September.

Q19 The Chair: Thank you. John, what steps did the board take to satisfy itself that the apparently ever-increasing level of gearing was not destabilising a model which, as Nigel has said, served everybody pretty satisfactorily for many years?

Sir John Kingman: I think it is very important to be clear that there was nothing unforeseen about the possibility that there were imaginable market scenarios that could create liquidity stresses for our LDI clients. That was very well understood in LGIM, our management fund arm, and the relevant boards, and I will come back to that in a second. It was also clearly very well understood by the regulators. It was identified by the Bank of England in 2018, and there was a big study by TPR and the Bank of England that followed that.

When it was clear earlier this year that interest rates were on the rise, the FCA did an in-depth study, including with LGIM, looking at collateral and stress-testing. These were absolutely the right questions to be asking. Had the UK simply experienced, as it were, a large secular rise in rates, which is what has happened in the rest of the world, we would not have seen anything like the events that Nigel has just described. It was the particular speed of what happened in the markets that caused it.

To come back to your question about boards, the group board at Legal & General is ultimately accountable for everything that happens in L&G and was well informed about the situation in real time. Before the event, there are two relevant boards here: LGIM’s own board, which is a board with very serious non-executive directors; and a board called the Pensions Management Company, which is an insurance company wrapper around many of these products that also has many non-executive directors. Both those boards had looked at the issue of leverage within funds.

What is absolutely clear, though, is that 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. That is what has really happened here.

The Chair: Coming back to the events of the 22nd and the 23rd, when it became clear that there was going to be a real liquidity crunch, which of the regulators did you or your team speak to, and what advice did you give them about how to head off what was looking to be a pretty nasty car crash?

Sir Nigel Wilson: We met with all the regulators quite regularly. In fact, all three regulators—the Bank of England, the PRA and the FCA—were represented on one or two of the conference calls we had. We had a very open dialogue about our analysis of what was happening in the market. It was clear during those discussions that they were thinking about whether an intervention by the Bank of England was required. Indeed, there was an intervention on the 28th.

We are not privy to the decisions that were made then or the analysis that was presented to them. We just explained that the gilt market was a lot more fragile than we had ever seen, and relatively small amounts of volume were causing very large price movements. When people think about gilts, they always think of it as the risk-free rate, and in a pensions context it is seen as a store of value as well—that you are buying something with a high degree of certainty. Neither of those things were true, as we saw. Some of the index-linked gilts in particular fell in value by 50% over that period, which is a truly extraordinary amount of change.

The Chair: What about the less liquid investments, the equities that had been bought with the cash that arose from the repos? There was a fire sale of some of those.

Sir Nigel Wilson: We would not have seen a lot of that, because the companies themselves would have access, and their advisers would be looking at where collateral would be found so that they could generate the cash to do that. We were very aware that the US credit market was a lot more liquid at the time than the UK credit market, so people could sell their US credit a little more easily than they could sell their UK credit.

Again, that is a lesson for us: that at times of stress there is more liquidity in the US markets than there is in the UK market.

The Chair: Do the pooled LDI funds that you run have any equities in them?

Sir Nigel Wilson: No.

The Chair: They are simply government bonds. So it was the companies themselves that had the less liquid assets.

Sir Nigel Wilson: Yes.

The Chair: So you do not have any visibility on the forced sales, or indeed the losses that were incurred on that.

Sir Nigel Wilson: No.

The Chair: Okay.

Q20 Baroness Bowles of Berkhamsted: Is it the same in the segregated accounts? We have just asked about the pooled accounts, but a lot of the business will be in segregated accounts. Are they also only in gilts, in bonds?

Sir Nigel Wilson: Yes. In the LDI set-up, we are only in gilts. Elsewhere, we may manage some of their equity or their credit, or other areas, because we might have a wider relationship with the corporate sponsor.

Sir John Kingman: One of the issues that we will need to work on in the light of all this is the ability of pension funds to post wider forms of collateral in conditions of liquidity stress—collateral from elsewhere in the fund.

Baroness Bowles of Berkhamsted: That did not work very well in the financial crisis, did it?

Sir John Kingman: It would have greatly eased the situation that we have just been through, and it is worth saying that, from Legal & General’s own point of view, we as a company were able to post wider forms of collateral. That was important to our ability to manage our balance sheet through this period.

Lord Cromwell: While we are at the context-setting stage, to be clear, is the message we are getting that LDI is basically a good product that does what it says, or does what it should—

Sir John Kingman: Yes.

Lord Cromwell: —and that the problem is actually the mini-Budget, which was a kind of black swan event? I have heard from both of you respectively that nothing was unforeseen, yet nobody could have foreseen this. I am trying to square those two positions.

Sir John Kingman: I would not want to leave you with the impression that we have been through this extraordinary event and nothing will change. That would be both unlikely and wrong. Clearly we, our clients, the advisers and the regulators all need to reflect on these events. Some of those things will be quite practical, like the forms of collateral that you can post, which I just mentioned. Then there will be the simple question of how much leverage pension funds should operate.

We certainly believe, and I think the pensions industry and its sponsors believe, that LDI has created enormous value for pension funds over a very long period; one estimate I have seen from one of the advisers is that it has created £150 billion of value for pension funds. So I think we need to be thoughtful about how LDI evolves, and there will be judgments to be made about how much risk to protect against. How likely is it that a future Government, having looked at this episode, will say, “Actually, we’re willing to create massive instability in our sovereign debt market”? But equally, it has happened, so it is imaginable that it could happen again.

The general point I would make is that we can operate with whatever level of risk protection everyone wants, but there is no free lunch here; the more protection there is in the system, the greater the cost will be to pension funds and their sponsors.

Q21 The Chair: If we go back to our meeting last week with the two regulators, the FCA and the Pensions Regulator, one of the many things that struck us was their comment that they rarely had any contact with the ultimate guarantor of the pension promise, which is of course the sponsoring company. You have said pretty much the same thing. That seems a bit odd.

As a second, different point, both the FCA and the Pensions Regulator acknowledged that their eye had been off the ball—my words, not theirs—and they had not been focusing enough on the high risk. Indeed, they were criticised for that by the Bank of England. On the regulatory side of this, there seems to be a recognition that far more attention should have been paid, particularly to the gearing issue and the buffers. We rather got the impression that that would be the direction of travel for the regulators.

Coming back to the company sponsors, you must talk to them occasionally.

Sir Nigel Wilson: Yes, we talk to them, and indeed to their advisers and consultants, regularly. Typically, we would meet the CFO to discuss it. However, we are only responsible for a bit of the overall picture. We do not sit in on the trustee meetings; that would be their advisers. We may go to part of those meetings and make a presentation based on the bit of the portfolio that we manage. Alternatively, via our pension risk transfer business, we may have a more comprehensive analysis to look at whether they should consider ultimately de-risking the portfolio by transferring it in a buyout to an insurance company such as ours.

Q22 Baroness McGregor-Smith: I have a question on what you have said so far on stress-testing. Much of the mini-Budget had been signposted over the summer, from help with energy costs to reversals of NI and lower tax rates. A lot of the themes on what the then incoming Prime Minister intended to do had been discussed.

I am interested in what happened to your daily stress-testing, with the UK Government signposting which way they were going to go. Did you just not believe that anyone would do that? I am a bit confused as to why the stress-testing did not pick up that this was the direction of travel. It is easy to say this with hindsight, I know.

Sir Nigel Wilson: It was the size of the response. The Chancellor made some comments over the weekend that the Government were going to make many more tax cuts, when the gilt market was already stressed from the Bank of England comments on the 22nd and the size of the changes announced on the 23rd. You are right that the direction of travel was right—

Baroness McGregor-Smith: I was not particularly surprised.

Sir Nigel Wilson: The quantum was much greater and nobody predicted the market reaction. That is what caused the problem: the market reaction was way bigger than anybody had expected.

Baroness McGregor-Smith: But is that more about the market? I look at this and think, “But everyone kind of knew which way this was going over a number of months”. So much of it had been signposted over the summer, even though it was believed that some of it would not happen. Does that change the way you think about what the UK Government will or will not do in the future? Will you change the way you stress-test? That is my question.

Sir John Kingman: I think you are absolutely right that most of the individual measures in the mini-Budget, and certainly the really expensive ones, were signalled well in advance. But one thing that I am certain took the market by surprise was that the Government simply presented all those very expensive measures with no indication whatever of how they might be paid for. That was a surprise.

Then, as Nigel said, the second thing that was very significant in influencing market actors was the apparent reaction of the Government through the weekend, which was an indication not only that they thought they had done the right thing in the mini-Budget—namely, not indicate that they were planning to pay for any of this—but that there was a lot more to come. I think the market thought, “Whoa, what are we dealing with here?” I do not believe that either of those things could have been anticipated.

Q23 Baroness McGregor-Smith: So when you are doing your stress-testing now, do you believe that those sorts of events could happen again, and would you model that in? That brings me to my next question: do you change the way you manage or recommend leverage in LDI funds because of what happened?

Sir John Kingman: As I said, the process of learning the lessons from all this will include a whole bunch of things, but probably the single most important thing is: how extreme a scenario should LDI vehicles be insulated from? We have worked with the authorities to ensure that they are extremely well insulated at the moment. It was very clear that the Bank of England’s objective was that, at the moment at which support was withdrawn, LDI vehicles could sustain a very violent further market reaction, were it to happen. In the event, it did not, because confidence had been rebuilt, but the present situation is that LDI vehicles are extremely well insulated.

There will then be a judgment to be made about where on the spectrum you want to put yourself between where we used to be and where we currently are. Our clients will have a view on that, we will have a view and the regulators will have a view. I think it is extraordinarily unlikely that anyone would advocate simply going back to where we were, but equally, as I said earlier, as you take yourself up that level of protection, you drive up costs to schemes and their sponsors, so there is a balance to be found.

Baroness McGregor-Smith: And do you think that will happen? In terms of the products you offer, do you see much more caution being applied?

Sir John Kingman: At the moment, we are operating in a much more cautious way, as is the whole industry, because that is where we, the Bank and the regulator agreed we would be in order to be in a situation in which Bank of England support could safely be withdrawn.

Baroness McGregor-Smith: Okay. I am still a bit bemused about the stress-testing. It is not just this Government; Governments around the world have been doing some interesting things in the last few years. We have also had a pandemic. Lots of things have happened. You could argue that black swan events are becoming much more common. Surely that does not imply that you should be much more cautious just at the moment. Does it not imply that you should continue to be much more cautious? There is a danger that we go the other way.

Sir John Kingman: The answer is yes.

Sir Nigel Wilson: I agree with you. The answer is yes, going forward. There were two parts to it. There was a degree of unpredictability around it. The market did not expect to have these two conflicting messages from the Bank of England on the 22nd and the Government on the 23rd; it was still digesting how the Bank could make one statement one day and then there could be a huge unfunded component in the mini-Budget. That was very confused.

I think the size of the movement and the thinness of the market surprised us. Trying to sell very modest amounts, particularly into the index-linked market, was causing further large intra-day movements in pricing that had never been seen before in the history of the gilts market.

That is the extreme. None of the analysts, or even our own internal analysis over the weekend, predicted that. We knew that the problem was getting worse on the Friday and over the weekend, and there were discussions with the regulator on the Monday, but the severity of it was unprecedented and not expected by anybody.

We had never stress-tested for that. We will now incorporate that into our stress-testing. As John just mentioned, we have already moved it out and, in effect, doubled the headroom that the funds have. We think that is an appropriate way to behave right now. When the dust has settled, I suspect there will be a review of appropriate stress-testing models.

There has never been a question that the stress-testing we have had in the past has been inappropriate. We have gone through all the correspondence between the PRA, the FCA and us, and nobody has suggested that we should run different scenarios or increase the stress-testing.

Baroness McGregor-Smith: Is that because everyone, from the regulators onwards, just got comfortable? I am not saying that it is just you guys. Did the whole system just believe that it could never happen—and then it did?

Sir John Kingman: I thought Jon Cunliffe’s letter to the Treasury Committee was very clear and compelling on this. Wrongly, no one anticipated that the British Government would choose to create such extraordinary instability in its own sovereign debt market. That scenario was unanticipated. The judgment that we have got to make is: in the light of all that and the stress it created and the need for support— which is very undesirable—where do we position ourselves on the risk protection spectrum? But that scenario was unanticipated. There is nothing wrong with the process of stress-testing; it is to do with a scenario occurring that no one had tested against.

Q24 Lord Sharkey: I turn to the question of regulators, particularly the FCA. I would like your view on the level of the FCA’s oversight of the investment strategies used by asset managers managing pension schemes’ assets in LDI funds. Is the level of oversight satisfactory? Is it good?

Sir Nigel Wilson: As you have probably seen, we have a huge amount of oversight from numerous different regulators. There is an enormous amount of multiple oversight of what we are doing. We are not short of regulatory oversight, given the number of different regulators that look at this. We never feel underregulated, if that is the question. There is no comfort zone that we operate in. We are constantly challenged by our regulators.

Lord Sharkey: I take your point. I suppose I should have said “effective oversight”.

Sir John Kingman: To be fair to the FCA, as I mentioned earlier, it did an in-depth study in March 2022 of the consequence for products like this of rising interest rates. LGIM was heavily involved in that work, as I said earlier. In my view, the FCA looked at the right issues. It looked at collateral and stress-testing. The FCA did not say, “What happens if the British Government does this extraordinary thing?” My personal view is that that was not a failure on the part of the FCA, but obviously that is something that reasonable people can differ on.

Lord Sharkey: Can I rephrase the question again? It is about effectiveness rather than the general level of oversight. I take the point about whether it was possible or prudent to increase the 100 basis point test. I worry slightly that there is the possibility that it leads to a kind of groupthink about all this. No one was making any kind of radical input about the need to extend the parameters of the stress-test, for example.

Sir Nigel Wilson: That is a valid point. Do we need to look for more black swans? The three of you have made a very similar point: given what has happened and the volatility and variability around the world right now, we should be looking for more black swan events. I think we accept that that will result in a different type of stress-testing. We have an energy crisis, war in Ukraine and Covid, we have had quite a lot of fairly black-swannish events all coming together at the same time, and we need to think about the stress that that is putting on the system and, indeed, the capital buffers that we have around those stresses.

Lord Sharkey: Something that has struck us from some of the testimony we have heard so far is that it was not entirely clear who was gathering what information and who was providing it to whom. It seems difficult to see an effective system of oversight where those conditions prevail. Do you have a view on the provision of information?

Sir John Kingman: I am sure that is one of the issues that will have to come out of this. I would not say that we have seen a breakdown of functional co-operation between the Bank, the PRA, TPR and the FCA, but I am sure that question will need to be asked and satisfactorily answered. A question that has already come out of discussions like the one you are having in your committee is what data was collected. Would all the data in the world have caused people to ask about the relevant black swan here? I am not sure.

Lord Sharkey: You can probably separate the two, to a degree.

Sir Nigel Wilson: I think separating them is the right way to look at it. We are often asked to provide information twice, once to the PRA and once to the FCA, because this is an unusual product in that it has multiple regulators.

Lord Sharkey: Which may of course not contribute to the solution. Would you as L&G be willing and able to provide regulators with key information on systemic risks on, say, a weekly basis?

Sir Nigel Wilson: Yes.

Lord Sharkey: You do not currently do that.

Sir Nigel Wilson: We do.

Q25 Lord Burns: I should record that I was a director of Legal & General some 20-plus years ago.

Sir Nigel Wilson: He attended the original meeting when we set up the LDI.

Lord Cromwell: So it is all your fault.

Lord Burns: It would appear so. The committee understands that many LDI funds are domiciled overseas. Is that correct? Why is that? Is it an issue of regulatory arbitrage?

Sir John Kingman: I am not a specialist, but my understanding is that the LDI funds were originally set up in Ireland, because Ireland was ahead of the UK in creating something called the protected cell regime, which is a regulatory concept that was particularly helpful to the LDI business. I believe that now exists in the UK, but because we had already set it up in Ireland, we continue to run it there. We are subject to rigorous regulation by the Central Bank of Ireland, and there was a huge amount of contact with that central bank. That is the reason.

Sir Nigel Wilson: It is not regulatory arbitrage.

Lord Burns: Could you tell us more about why it happened in the first place?

Sir Nigel Wilson: Just timing. It was not possible to set it up in the UK in a structure where we could operate it, so it was set up there. There may be a recommendation that it be brought back into the UK, but that was not a problem to us, other than yet another regulator having to look at it.

Lord Burns: But you are saying that it has made no difference to the regulatory aspect of it.

Sir Nigel Wilson: No.

Baroness McGregor-Smith: Do you think we need to introduce a resolution regime for non-banks?

Sir John Kingman: I know this is very much on Nikhil Rathi’s mind, and it is a question well worth asking. I do not know the answer, because we have not worked it through, but I know Nikhil and the FCA want to give thought to it, and we would like to be part of shaping that conversation with our thoughts on what might and might not work. We do not have a resolution regime up our sleeve, but it is a good question to ask.

Baroness McGregor-Smith: Can you see it coming?

Sir John Kingman: I do not know. It depends. When you have had a situation where the central bank has had to step in to provide liquidity support in order to prevent LDI funds from failing, it is understandable that the authorities want to ask, “Could you create a mechanism through which funds could fail, but in a way that does not endanger the system?” That seems to be a very rational question to ask. It is hugely technical, and we have not worked through what the answer might be.

Q26 Baroness McGregor-Smith: Looking at risk across the entire system for LDIs, many people are involved and have a role, including the regulators, but who do you think has the overall understanding and responsibility for the actual risk of LDI funds collapsing? Or does no one have that overall responsibility? Is it all too spread out?

Sir Nigel Wilson: It is ultimately the Bank of England, as we saw, because it is the ultimate decision-maker around this. As you said, in the old days there was the FSA, but now there are two sub-components that work together.

On the data and analysis around the intervention, we spent much more time discussing that with the PRA rather than the FCA, but the FCA received a huge amount of data during the crisis. That is a very good question to ask, and we do not necessarily have the best answer to it.

Baroness McGregor-Smith: So, looking at how it is all structured now, do you think the regulators all work closely enough together to ensure that nothing falls through any cracks? Which regulator should take the lead on all this?

Sir John Kingman: From our perspective, we see more overlap than underlap, if I can put it that way. I would not say that one of the causes of what went wrong here was that there were a number of regulators that were failing to work together effectively. That would not be our diagnosis of what happened here. We will work with whatever regulatory architecture we are given. In the end, as Nigel says, the central bank had to take the lead, because the central bank has the balance sheet—it has the money—and, in the end, support was needed. You are never going to get away from that.

Baroness McGregor-Smith: If one of the regulators took the lead, would they need additional powers to take the lead in this area?

Sir John Kingman: That is a very fair question, but not one that we have any immediate suggestions for.

Sir Nigel Wilson: That is another very good question to ask.

Q27 Baroness Bowles of Berkhamsted: This question follows immediately on from that. Given that the destination of a lot of these pension funds is towards buyout, is there a logic that the PRA should have a bigger pre-buyout role? Eventually, once they are bought out, they come under you and then they are under the PRA anyway.

Sir Nigel Wilson: There is some logic in that, and each side could present quite a compelling case. Your point is very valid, given the strong financial position that the pension funds are in now. The probability of them engaging in buyouts has gone up by a large amount just in the last year. In a sense, that has swayed the pendulum towards the PRA playing a bigger role in this area, because it has oversight of the ultimate destination. Even now, there are various parts of this that are not fully regulated, which you have previously asked questions about, so there is still some mileage in going through the discussion that you have just raised.

Q28 Lord Cromwell: You have highlighted several times that consultants are really the key advisers to the DB pension trustees, but your fund managers will work with those consultants. Could you explain a bit more about how they work with them, and how they might do so differently in future?

Sir Nigel Wilson: I think that is true. In fact, tonight I am presenting to the consultants. We have regular dialogues with them to try to get a common understanding of our views on policy and issues like that. We definitely have a good understanding and working relationship with these very professional advisers. We do not advise them to advise their clients; they advise their clients and will take soundings off us and indeed off other firms. Those consultants will call us to meetings with the trustees and we will attend them. I occasionally attend them myself to answer questions, particularly if the corporate sponsor is sitting in on the meeting. We are the hired help in this process, if you like, not the key advisers.

Lord Cromwell: The consultants may feel that they are being lined up to take the fall for what happened here. Are they not turning round to you and saying, “Your stress-tests should have pointed this out, notwithstanding the black swan, and we just passed on the advice that we got from you guys”?

Sir Nigel Wilson: I do not think we are trying to blame anyone. For many years this has worked incredibly successfully and, as we sit here today, it has gone back to normal; rates have moved in such a way that we have an ongoing dialogue, we are completing PRT transactions, and people are thinking of transitioning from LDI to PRT. It was a particularly dark period for this industry where we all had to do extraordinary things to get us through, and that caused an amazing event here in the UK, but the working relationship with all the consultants is still very positive. They are the people who will continue to give advice, and that advice will soon be respected by the corporate sponsors. There is no blame game going on from our side—except in respect of the mini-Budget, which we think caused disproportionate and unprecedented movement in the gilt markets that we have never seen before.

Lord Cromwell: And are these consultants regulated? If not, should they be within the regulatory perimeter?

Sir John Kingman: There is a debate about that. Our preference would be for the consultants to be brought within the scope of regulation, but not particularly for reasons connected to this episode. Why might you want to regulate the consultants? Because they are very important players in the system: they are advising pension trustees, and obviously they have serious responsibilities. What is visible to us, and this has been identified by numerous commentators, is that there are conflicts within the consultant model. That is a fact. Personally, I think the debate about regulating the consultants has nothing to do with this issue. I do not believe that, had the consultants been regulated, this episode would have been avoided.

Lord Cromwell: Looking at the trustees who are getting this advice, can we think, hand on heart, that they really understood that there even was leverage or, if they did, what its impact might be? If they did not, was it the consultants who were not making that clear to them, the regulator who was not making sure that it was made clear to them, or indeed your firm that was not making sure that it was clear to everyone?

Sir Nigel Wilson: Again, that is a good question to ask. I have dealt with quite a lot of trustees over time and have found them to be intelligent, highly engaged and very committed to delivering great outcomes for pensions.

Lord Cromwell: I am sure that is the case, but in the specific case of LDIs, do you think they really have—

Sir Nigel Wilson: They are therefore advised on a lot of things by their advisers. To a certain extent, pension risk transfer may be even more complicated than LDIs, and in my dealings with them they have been very well advised and well informed. This is not an industry that sprang up overnight; it has been there for 20-odd years. So they have perpetually been getting advice over a long period on what they are doing. I cannot say I have asked every trustee, but certainly in the meetings where I have been present with trustees, they have been very well informed and asked incredibly good questions about asset liability management.

Q29 Baroness Donaghy: To what extent has LDI come to prominence because of changes in how current estimates of pension liabilities are measured, rather than changes in long-term liabilities themselves? Should pension accounting move away from market-based discount rates, given that there is no interest-rate risk to actual liabilities, only estimates of their present value?

Sir Nigel Wilson: I see that the Chair is looking at me; I was looking at him but then realised that it was in fact my job to step up and answer that profound and challenging question.

We have a set of rules at the moment that we operate within. There is all the regulatory oversight, and obviously the accounting system works in a particular way. That itself has changed a lot, since we started in 2001, to improve transparency. There is certainly a case for doing a bit more work on whether this is still appropriate in 2022 and whether it is the best way for UK plc to operate its pension system. Is it causing any big distortions? I am not sure it is, but I am not sure I have given that particular question enough thought, and whether it is one of the big questions that we should be asking as a consequence of what has gone on. What is the right way to shape and discount both the assets and the liabilities in the pension system? Does it in fact discourage investment in equity, growth equity and so on?

We think there is a relevant discussion around this in both the DB pension system and the DC pension system, in part because of the way DB has been managed for a long time; we have all seen the massive reduction in equities. In the DC space, we would like to see reforms that encouraged people to invest in growth equity over a much longer period. Then there is a whole series of debates about whether the one-year VaR model that we use, ranked throughout the system, is appropriate when we are looking at 20-year, 30-year or 40-year assets and liabilities.

I am sad to say that I have not got really good answers to your question, but it is a very good question to ask and this is a good point in time to be asking it.

Baroness Donaghy: We have a member of the committee who is not here today who feels very strongly that there should be a larger proportion of equities involved in pensions. Perhaps it is a slightly mischievous question, but do you think that history will thank Liz Truss for exposing some of the vulnerabilities in the pensions market?

Sir Nigel Wilson: I think that would be an odd interpretation of it. There is a debate to be had as to whether the amount of equities held across both DB and DC pension schemes is appropriate in helping to drive economic growth in the UK. That is a very valid question to ask. At the moment, clearly there is not a huge amount of equities held by pension funds in the UK. As a general point, we would feel that having more growth equity in the system is a good outcome.

We may want to spend more time on DC pension schemes, because the duration of those is even longer—30, 40, 50 or 60 years, particularly for young people. The fact that auto-enrolment has been such a great success in the UK—as good as anywhere in the world—is evidence that we have people who are now saving for their retirement, with a set of rules that have been very successful.

As for DB schemes, as you rightly pointed out, a lot of that will transfer into the PRT space over the next 10 years. That is even more regulated, and there we would tend to hold almost zero equity.

The Chair: I have to say that, to my simple mind, to measure the stability of a pension fund by reference to the current interest rate, which will move up and down—hopefully down, over the next couple of years—is a little dangerous, particularly if, in order to maintain that stability according to the current rules of the road, you have actually lost 20% of the value of your fund, because you had to have a fire sale.

I would rather be in a position where I could take both those factors into account. Yes, the market may recover, and the value of the equities you have will recover, but once you have sold them, you have sold them. It seems from a common-sense point of view that it would be better to have a more balanced way of looking at these things. That would also feed into the Government’s quite correct ambition to get greater pension fund investment in the British economy, rather than investment in very complex financial instruments. What do you think about that? How do you reconcile that? In a sense, you are in the business of coming up with answers.

Sir John Kingman: In one sense, yes, but in another we are here to help our clients to operate and deal with the cards they are dealt. For once, I am afraid you have found a topic that we do not have very developed views on. There are violent debates about this in the financial economist community. There is a very strong view in the accounting world that the current approach is the right way to value liabilities. Of course, if a corporate sponsor is willing to accept the risks of a high level of equity ownership, there is nothing to stop them choosing to do that. They just have to accept what that means for the volatility that hits their accounts.

As Nigel says, there is a huge opportunity for the future in the DC world. There is lots to do there and we are very much on it. In the PRT space, we are delighted about the reforms just announced by the Government, which will greatly enable our ability to deploy these assets in a more flexible way. However, I am afraid that we just do not have a strong view as a firm on this accounting question.

The Chair: Fair enough.

Q30 Baroness Bowles of Berkhamsted: Immediately following on from that, I do not understand why they use the discount rate that they do. Is there not some separate calculation that could be done if you use IFRS 17 for pensions, rather than IAS 17 for companies? If you use the one that is meant for pensions, you end up with a smaller gap than if you use the one that it is common practice to use.

Sir John Kingman: I am really sorry to say this, but I think you need to engage with accounting specialists on this. It is a very technical area and, as I say, opinions are held with great strength. Is there anything you want to add, Nigel?

Sir Nigel Wilson: I think you have the right questions, but I am not sure you have the right people in the room to answer them.

Baroness Bowles of Berkhamsted: I only just thought of it.

Sir Nigel Wilson: As John said, this has been accounting driven. Lord Hollick made a very important point. If you take a very long-term view, you come out with a different view, but if you take a one-year VaR modelling view all the time and you want to take a particularly prudent view, you end up investing a lot in bonds. There is lots of empirical evidence to show that we once had a very healthy amount of equity in the pensions system but it has diminished dramatically over the years. How funds are measured in the accounts has become a very determining factor in how they behave.

Baroness Bowles of Berkhamsted: This problem does not happen with local authority pension funds, which are not funnelled down that route. They have not been stung either. They hold more equities and can benefit from all the good things that we have just mentioned. That is not really what I was supposed to be talking about—

Sir Nigel Wilson: But it is another very important issue. We have actually written papers on that topic and how to scale up that industry to make it a much more powerful engine for growth here in the UK, investing in lots of new and exciting assets that would help the UK economy to grow.

Q31 Baroness Bowles of Berkhamsted: Next, you have explained that you deal with the investment consultants, but you also go to trustee meetings, and ultimately, it is money coming from the pension fund, instructed by the trustees, to you. That means that you are effectively the agent of the pension fund and the trustees. In that position, has anybody ever raised concerns with you about the legality of pension funds effectively borrowing—leverage is the same thing as borrowing—given the prohibition against borrowing in the originating legislation on IORPs, carried through into the 2005 regulations?

Sir John Kingman: I am not aware of any concerns having been raised with us about that, although I have obviously seen the debate in your committee and the discussion you had with the regulators about it. Our clear understanding is that the LDI products that we offer are offered within the law, because they rely for their execution on repos and derivatives. Derivatives are explicitly permitted by the regulations, and repos are legally distinct from borrowing. That is the legal position as we clearly understand it, and that is the basis on which we have been offering these products for 20 years, as Nigel said.

Baroness Bowles of Berkhamsted: The provision for derivatives is not quite transposed correctly, because the word “investment” is missing. But there are also other requirements around being prudent, and not being overexposed to particular counterparties and so on. Are you happy that you are entirely within this prudence requirement?

Sir John Kingman: We are very clear that we operate within the law, as I hope you would expect. It is for your committee to take a view on whether the law is in the right place, but we operate within the law—

Baroness Bowles of Berkhamsted: As you have interpreted it.

Sir John Kingman: As we understand it to be.

Baroness Bowles of Berkhamsted: Do you have a legal opinion on that? My reading of the law is quite differently nuanced from yours.

Sir John Kingman: As I say, we are a very major firm. We operate within the law and have done so for a very long time. We are subject to extensive scrutiny by regulators. Had they taken the view that we were operating outside the law somehow, they would have said so, but they never have. Our clear understanding is that we are operating within the law. That is what you would expect of a firm such as ours.

Baroness Bowles of Berkhamsted: ESMA’s Q&As say that repos are borrowing.

Sir John Kingman: Repo is legally different from borrowing.

Baroness Bowles of Berkhamsted: I understand that, but they give you leverage, and if you look up leverage in a dictionary, it will tell you it is borrowing. Does it trouble you ethically, as a company that likes to be highly regarded on that front, that you are basically providing a vehicle for circumventing the intention of the legislation?

Sir John Kingman: I do not accept that description. We are in the business of providing a product to our clients, and we have done that for 20 years, as we discussed earlier. It has created massive benefits for our clients that are well understood. I hope we all believe that whatever emerges from this episode does not lose those benefits. It has been exhaustively studied and is well understood by regulators; you have heard that yourselves in your discussions with them.

Baroness Bowles of Berkhamsted: They did not actually manage to provide any evidence that it was legal.

Sir John Kingman: But your question to me was whether I have ethical concerns about the business that we have been providing. On the contrary: the business we have been doing has hugely benefited British pension funds, and of course I do not have any ethical concerns about that.

Baroness Bowles of Berkhamsted: You can do things that are against legislation that are beneficial, and they end up causing risks and problems. Of course, you would not have had any of that if there had not been borrowing, and it would not have got to such a level.

Sir Nigel Wilson: I do not think we can quite say that we would not have had a problem with 250 basis-point movements in three days in index-linked gilts and a halving of the value. That is a huge problem for the UK economy that we are trying—

Baroness Bowles of Berkhamsted: But there were many more linked in because of the leverage. It is four, five, seven times instead of one.

Sir Nigel Wilson: It would have happened without the leverage. This was not caused by leverage. That is one of the important takeaways. This was caused by the mini-Budget and the massive movements in gilts. Regardless, we still had to try to provide collateral, and it was the difficulty of providing the collateral and the movements in collateral over a very short period of time.

Baroness Bowles of Berkhamsted: Yes, the mini-Budget was the black swan, and not enough attention was paid to the fact that, as has been said, the black swan was already swimming along and kind of in plain view. The black swan caused the issue, but that does not mean that you do not look at the whole structure.

Sir John Kingman: We agree with that.

Baroness Bowles of Berkhamsted: I think you could say that there may be a reason for doing things the way they were done, but, as far as I can see it, when you clearly have in black and white that pension funds are not allowed to borrow but you do something that is economically the equivalent of borrowing, you have to ask, “Is that the right thing? Is that what should be going on?”—if you take the high ground on these things, as I do because I helped to write them.

Why was that there? The whole point of it being there was so that the pension funds are in no way beholden to somebody else. Do not have calls on them that come in unexpected ways. Do not lose their funds. A lot of these things about not borrowing we learned from Maxwell, and it is that that has got into the legislation. So surely there must be pause for thought as to whether trying to evade what is a fundamental point is right.

Sir John Kingman: We completely agree that, in the light of everything that has happened, there needs to be a process of reflection, which we will participate in but will not be the end decision-takers in, because principally that will be for regulators and our pension fund clients. That, in my view, needs to look at the balance of the benefits provided by LDI over 20 years with the clear risk exposure that has been shown by these events. As I have said a number of times, a balance will need to be struck there. We will operate for our clients within whatever structure it is decided is the right one going forward.

I am absolutely clear that what we have been doing is within the law, but that does not go to the heart of your question, which I think is: what is the right framework going forward? I hope that that will be one that preserves the benefits of allowing pension funds to hedge their risks, as they have done, but one that learns the lessons of these events.

Q32 Baroness Bowles of Berkhamsted: Right. We will move on from that, because we are not getting anywhere, really.

You have had some interesting, and I am sure welcome, news from the Government over changes to Solvency II.

Sir John Kingman: Not before time.

Baroness Bowles of Berkhamsted: Yes, well, for most of them I am probably on the same side of the argument, and was while Solvency II was still being made, as you probably recall. This means that you will make more money out of your existing book. Does that mean that prices for buyouts will be lower, because down the track, when the Solvency II changes come into force, this will make things easier for you? Will you be lowering prices for buyouts or making a killing twice over from the fact that you now have a queue of people coming in and prices have already gone up due to market effects, yet further down the road it will be a lot rosier in terms of how much you can make out of it?

Sir Nigel Wilson: That is an interesting interpretation. The first thing I would say is that these are very competitive markets. Yes, Solvency II has resulted in a number of changes. The impact on our solvency ratio has improved, we think, by 3% or 4%. We are actually at about a 230% solvency ratio—we now have a 233% or 234% solvency ratio—so we have a very strong balance sheet, which will help to facilitate doing some of these transactions.

Will the return on capital that we are expecting in future be higher than it is today? We do not think so. We think that people will price very competitively still, and that the return on capital will be very similar, so we will definitely not be making a killing in this market.

Sir John Kingman: The main effect of the changes, which as you say are very welcome, is to enable us to invest these assets in a more flexible way, which we think will be of benefit to everyone, including the wider economy. But, as Nigel says, this is an intensely competitive market. The benefits can apply equally to all our competitors and we would expect them to be competed away.

Sir Nigel Wilson: I will just make a couple of other points to help with clarification. What was a £1 billion scheme because of the change in the valuations and the movement in rates is now a £600 million scheme. The costs of serving that scheme in future will be the same regardless of whether it is £1 billion or £600 million, so the absolute quantum of profits that we will make as a consequence will be less, but the return on capital will probably be about the same.

The point that John has just made about the growth agenda here in the UK is one that we are particularly pleased about. We had quite a lot of onerous rules from Solvency II that were Europe-determined, if you like, rather than UK-determined, and we have managed to get more balance in it and make it more relevant for the UK.

We are hoping as a consequence of that to be able to invest more assets in the UK. At the moment, over 50% of our assets that are being used to back UK liabilities are outside the UK. We want to create a bigger asset pool in the UK that we will be allowed to invest in, because we think that is good for the UK economy, which is a very good reason to do it.

At the moment, because of the complexities, there is a huge amount of structuring that has to go on to fit the rules, and we are hoping that that will also reduce.

Baroness Bowles of Berkhamsted: I understand that. Going back to the point about the buyout market being competitive, my understanding now is that it is becoming the normal practice to demand exclusivity up front. That would tend to reduce the options for going around and sampling the market. I understand exclusivity coming in at the point when a lot of the real work commences, but is up-front exclusivity something you do?

Sir Nigel Wilson: I would love to know how to market and to get exclusivity, but sadly my skills are not good enough to get us exclusivity.

You are right about the back end. We have a competition that could be between three, four, five, six, seven different competitors. Somebody moves forward in an exclusive position to try to complete the transaction, which may take another one to two months. But it is a competitive market.

Baroness Bowles of Berkhamsted: So you are not doing that anyway.

Sir Nigel Wilson: We do not get exclusivity. We have what we call umbrella deals—we at Legal & General think that the word “umbrella” is very appropriate there—where we have a long-term relationship with clients. I am trying to think off the top of my head whether we have ever been given exclusivity.

Baroness Bowles of Berkhamsted: It has come to my ears, so I thought I would ask you what it generates.

Sir Nigel Wilson: I am very confident that the big clients that we are expecting to transact in 2023 and beyond will not result in an exclusive situation for Legal & General or, I hope, for any other competitor.

Q33 Lord Reay: Before I ask my main question, I want to ask you how you manage potential conflicts within your business, in the sense that you operate in many different areas of the pension fund arena, particularly in DB. You have the LDI structuring side and obviously third-party funds at LGIM, and you are selling LDI and leveraged LDI to the pension fund clients. How do you manage that? Presumably you make more money with leveraged LDI. Perhaps you could address that.

Sir Nigel Wilson: I do not think we look at it through that lens. As we mentioned earlier, we are managing about £400 billion of assets and making circa £40 million to £50 million profit. That is not a lot of profit on managing £400 billion of assets; it is only 2% of the group’s overall operating profit. This is not a business that we look upon as particularly lucrative. We are very much playing the role of agent. Two to four basis points, which is the average fee that we charge for these activities, is not a huge fee level. We can charge that fee because we have economies of scale, we are big and we are efficient, but we do not look at it through the lens that adding leverage will make us more additional profits. That is not really what we do—

Lord Reay: How likely is that one of your third-party funds at LGIM would take out LDI, not with you but with someone else? Would that ever happen?

Sir Nigel Wilson: Frequently, yes. We do not have exclusivity that means that if we are managing the funds, we will do the LDI. We are up against BlackRock, Insight and Columbia Threadneedle. These are very large US companies, not small local competitors. Along with Schroders, the other competitor, they are a pretty strong competitor set.

Q34 Lord Reay: I turn to my main question, which you have touched on previously. Do you feel that the Government provide a clear steer as to what it is seeking from investments by pension schemes? Was the drive towards supposed de-risking a result of the underlying legislation, government policy or its interpretation by regulators?

Sir John Kingman: That is a very big question. I will have a go, and then Nigel should add any thoughts that he has. The main driver from the Government over many years has been that pension funds should have sufficient assets to pay their liabilities, which does not seem unreasonable. There is the accounting question about how the liabilities are measured, which we have touched upon. There have been attempts over the years—for example, there was an attempt in the late 1990s—to try to encourage DB schemes to invest more in venture capital and so on. That has never proved massively fruitful. Our view as a firm is that the greatest opportunities here are not in the DB world but in the DC world, because the DC world is an enormous pool of money and it is the future, whereas the DB world is slowly but steadily shrinking. I suppose those would be my answers to your question.

Sir Nigel Wilson: We definitely see the DB world as having a lot of rules and regulations already. On a journey into pension risk transfer, if we get to pension risk transfer, we think there are more opportunities to invest in new types of assets because of the changes that have been made, particularly in things like the transition to net zero, which we think is very important.

The DC market is about £500 billion as we sit here today, and we have about £150 billion of that. We would like to see that change so that we are allowed to invest more in growth equities in particular, particularly here in the UK. John mentioned the VC industry. The UK VC industry is tiny in comparison to the US industry, and we are in danger of being crowded out by foreign investors in UK VC. We see DC as playing a big role in helping to create growth industries and scaling them up here in the UK.

Lord Reay: You mentioned that you would like to see some reforms to encourage more equity investments. What, in addition to Solvency II, would you be looking at there?

Sir Nigel Wilson: Solvency II covers just the DB. Again, DC is a different set of regulations. The auto-enrolment scheme has been hugely successful: typically, 92% to 95% of the individuals working for an employer have been auto-enrolled into the pension scheme, so that has been a huge success.

Most people just tick the default fund, and few people switch. Very few people reconsider their portfolio during the life of their pension. We would like to have a situation where a bit more guidance, information and encouragement were given to people to nudge them in the direction of holding more equity in their portfolio, particularly in the early years. Again, you are investing every year for 30, 40,50 years, so the concept of one-year VaR being a modelling way of thinking through how to invest your DC pension is, in my view, not the right one. You should be looking over a much longer period.

Q35 Lord Cromwell: I would like to come back to leverage—not the legality of it, because you had an interesting exchange of views with Baroness Bowles on that point. It was Nigel who stated that it was the mini-Budget that was the problem, not leverage, yet some of the solutions that we were groping towards in the earlier conversation were around curtailing the levels of leverage and the headroom involved, which implies to me that leverage is something that needs to be addressed and is therefore part of the problem. Which is right?

Sir Nigel Wilson: They are both right, actually. The premise that there will be more black swan events, which I think we all agree on, means that we have to think about how volatile the markets could be. Remember that, at one point, gilts were over 15%. That is a bygone era, but they were much higher than they are today. Our thinking today is in a much narrower range because we have grown accustomed to that, but the jumps on any given day have been unprecedented. If something is more volatile then the amount of leverage that you can hold, the headroom goes down. You have to have more headroom, in a sense, because of the increase in volatility, particularly for longer duration. Leverage is a useful tool, but you need to take it in a duration context. Therefore the more volatile, the longer duration, the more of a safety net you need. The headroom is diminished if there is more volatility and there is greater duration.

The good news is that the DB schemes are diminishing in duration each year and more of them are moving elsewhere, but the evidence suggests that we are going to live in a more volatile world and we therefore need to reconsider the modelling, which is kind of what we discussed earlier. If you had asked me about that two or three months ago, I would not have given such a definitive answer.

Q36 Lord Cromwell: I have one other point, if I may. I do not want to misquote Morecambe and Wise, but I am glad that we are hitting the right notes but not necessarily with the right people. You have said throughout that there will be cause for reflection on this, and you have touched on a number of areas that you have obviously had time to reflect on. I hope you will not be shy in letting the committee know where you think the changes should fall, because you are the experts in the room here.

Sir John Kingman: The broad areas are around leverage, as we have discussed at length, and the question of what collateral pension funds are able to post. That is technically fraught, for all sorts of market-related reasons, but well worth exploring. I know that is on the regulator’s to-do list—and on ours, as you would expect.

Sir Nigel Wilson: Exactly who gets regulated is something else that we have views on. It depends how much detail you want.

Lord Cromwell: I will leave that to the Chair.

Sir Nigel Wilson: There is a very good question about who is the principal regulator in this whole industry. We have multiple regulators. We can easily get to four or five in some of these areas. It all goes back to the Bank of England, but there needs to be some clarity around who would be the principal regulator for this particular part of the pensions industry.

Q37 The Chair: I would like to pick up on Lord Reay’s question in a slightly broader context. This February, we published a report about the transition to net zero. A significant part of that report was about the need for the Government, first, to set out its priorities; secondly, to create markets, which would encourage competition; and, thirdly, to see what role government finance can play in encouraging new investment.

You have made the point today and on many previous occasions that L&G is very much up for that. We heard from one of your competitors, who gave us the same enthusiastic message. We also heard from Canadian and other overseas pension funds and institutions, which professed a keen appetite for this. The Secretary of State for BEIS at the time promised that by the end of this year we would see the Government’s plans and that, no doubt, the Treasury is working on them even then, so that by Christmas we would know which financial businesses to invest in—nuclear power stations, et cetera.

Could you share your thoughts on what would encourage you to invest in the transition? What criteria do you have in mind? You have talked about long-term investment in DC funds, particularly for younger people. There seems to be a golden opportunity here. Another project that we have looked at recently is Thames Tideway, which is a self-contained project that has attracted investors and, touch wood, it is looking quite good. What criteria do you have in mind that would encourage you to invest in infrastructure to transition to net zero?

Sir Nigel Wilson: I agree pretty much 100% with what you said there. I will give a summary of what we do already and will then talk about what we could do in addition to that. We invest in offshore wind, onshore wind and solar parks, which we own. Those are primarily in the UK, but we own some in other geographies as well. We own a very large shareholding in Pod Point, which is the UK’s largest EV charging business. We also invest in Onto, which is the largest EV car leasing business.

We invest in nuclear fusion. We think there is a bright future in the UK. That is a great example of something that you would want as a small part of your portfolio, but which is a good bet over a 30 to 40-year period, I think. The UK has tremendous science in this area. We would like to invest in areas such as carbon capture and storage, which the UK is very short of, particularly in some parts of the north that have indicated that they have a real interest in that. One of the benefits of reforming the Solvency II rules is that we will not have to have this strict adherence to absolutely fixed cash flows. As long as the cash flows are highly probable, we can include them in the portfolio.

On the growth equity side, we have a whole list of companies that are emerging in the UK. We would very much like them to remain in the UK, owned largely by shareholders, and I would identify DC schemes and young people as part of that. The excitement about this area is huge among young people, who want to invest in these areas as well. There are tons of embryonic projects in the UK waiting to be financed. Freeing up the Solvency II rules and, indeed, freeing up the DC rules would enable Legal & General to invest even more in the UK than we currently do.

Sir John Kingman: I would like to add one observation. It is helpful to distinguish between the growing number of technologies that are economic without any form of government financial support and those that still need such support.

The best possible thing in this area is that the range of the first category is getting larger. That is incredibly exciting. We are active in that space and are very up for being considerably more active. The basic issues there for the Government are all about regulation and planning. There is more to do there, but we cannot complain on Solvency II, because we have finally got the answer on that.

The territory of technologies that still need some form of government support, which currently includes nuclear fission, is more difficult for the Government, because it has to put money on the table, and is also, on the whole, less attractive to us. But we think there is plenty to do in the first category.

Sir Nigel Wilson: Another example is retrofitting housing. We are the largest shareholder in the UK’s leading consultant in retrofitting housing. We think that is a critical area in which to invest, creating lots of jobs. In a couple of weeks, I am going down to Truro to open our second ground source heating manufacturing plant here in the UK, which is a great thing to happen. Again, we are the major shareholder in that business, but not the only shareholder.

We are investing for the very long term. We would like to scale up these investments and use our expertise in pensions to scale up these opportunities. You rightly point out that the Canadians are coming.

The Chair: Closely followed by L&G, I hope. On that happy note, thank you very much indeed for joining us today. Thank you for your candid and helpful comments. We look forward next to meeting with the Ministers, and you have helped to arm us with some interesting questions.