Written evidence from Legal & General Group LDI0075

Inquiry:  Defined benefit pensions with Liability Driven Investments

1. Thank you for your e-mail dated 9th February 2023.  We set out our answers to each of your questions below.  By way of background, Legal & General’s LDI business is managed by Legal & General Investment Management Ltd (LGIM), a subsidiary of Legal & General Group Plc. Approximately 99.7% of LGIM’s LDI clients are advised by investment consultants (the remaining 0.3%, referred to as ‘fiduciary clients’, are advised directly by regulated advisers through LGIM). Where this response refers to communications with clients, in the vast majority of cases that communication is through a client’s adviser.

Your questions:

How often you are communicating to clients, whether you are systematically communicating to all clients, and at what lag to the actual data.

Whether the data you are communicating includes:

1. The total level of collateral resiliency (split between holdings within the LDI fund and additional holdings with the manager)
2. The distance in terms of basis points to the next collateral call and how large this is likely to be
3. Any parameters / thresholds they are using for a red-amber-green system to guide clients

2. Overall, LGIM communicates systematically with all of its LDI client types (i.e. segregated mandates, single investor pooled funds, and multi-investor pooled funds). As each pension scheme client has bespoke requirements, LGIM works with its clients and their advisers to agree the content and frequency of the data it provides.

3. On a daily basis (with a one business day lag) key information is available for all client types.  In addition, following each weekly multi-pooled fund dealing date, we are able to also provide an aggregated client view.

4. As well as our systematic and automatic communications with clients, LGIM also receives and responds to queries from clients and their advisers on a daily basis.

5. We set out below further information provided by client type. 

Multi-investor pooled fund clients

6. Parameters/thresholds to guide clients: Each multi-investor pooled fund triggers a recapitalisation event following a c50bps move from their central collateral level. This is typically 300bps and will be up to 400bps for pooled funds with increased collateral requirements.

7. Distance to and size of collateral calls: When a recapitalisation event happens, clients automatically receive an email from LGIM setting out the amount that will be required to recapitalise each fund to bring headroom back to the optimal level. They can also opt to receive LGIM’s “LDI Analytics Sheet”, which contains, for example, for each multi-investor fund, the distance in terms of basis points to the next collateral call and how large this is likely to be. Clients have access to an online portal called LGIM Connect, which shows their unit holdings, valuations and fund prices. We are also then able to aggregate the information and show the impact of potential interest rate stresses which demonstrate, for each client’s total LDI fund holdings, the distance in terms of basis points to the next collateral call and how large this is likely to be.

8. Total collateral resiliency: Information on total collateral resiliency is also available.  For example, LGIM can show the impact of potential interest rate stresses alongside the value of the client's additional holdings with LGIM (including the value of the client specified fund(s) which LGIM has the ability to sell for collateral rebalancing purposes). 

Segregated mandates and bespoke single-investor pooled funds

9. Parameters/thresholds to guide clients: LGIM monitors collateral, particularly noting when it falls below key levels for the mandate. The first level is the minimum optimal collateral level which incorporates 300bps of interest rate headroom. The second level is the critical level for the client mandate which incorporates 200bps of interest rate headroom.

10. Distance to and size of collateral calls: LGIM proactively communicates to each client when its collateral falls below the optimal collateral level and again when it falls below the critical level. The communication will specify the distance to critical level and how large this collateral call is likely to be to restore the portfolio to the minimum optimal level.

11. Total collateral resiliency: Information on total collateral resiliency is also available.  For example, LGIM can show the impact of potential interest rate stresses alongside the value of the client's additional holdings with LGIM (including the value of the client specified fund(s) which LGIM has the ability to sell for collateral rebalancing purposes). 

I am aware that you may wish to publish a number of responses in answer to these questions. I can confirm that I am happy for the content of this letter to be published.

March 2023