It’s tough at the top and L&G’s Group CEO Nigel Wilson has been at the top longer than most.
Yesterday he went to war with the combative House of Lords Industry and Regulators Committee. He had no choice. The Committee were well briefed and seemed in no mood to have a gentle chat.
As I predicted, the tail of LDI was pinned firmly on the backside of the mini-budget donkey.
— Josephine Cumbo (@JosephineCumbo) November 22, 2022
“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,”
said L&G’s chair Sir John Kingman.
“That’s what really happened here.”
The Committee were having none of this and demanded to know what L&G were going to do about making sure LDI didn’t threaten to blow up the financial system a second time.
Less leverage, more (and more varied ) collateral and properly regulated advisers, was the answer given by Wilson. He challenged conventional ornithology by replying to the question “did you see the black swan coming” with the observation that L&G saw lots of black swans swimming at them at the same time.
The debate reached its maximum intensity when Sharon Bowles asked to know whether L&G had taken legal advice on whether LDI was legal. Sir John Kingman clearly took this as an affront claiming that LDI had been serving the pensions industry well for 20 years. This did not satisfy the doughty Baroness who reiterated what she’d told the FCA and TPR the previous week, that the system of swaps and Repos that LDI relies on was in everything but name “borrowing” and open to legal challenge as pension funds cannot borrow.
Other members of the committee were keen to quiz Wilson on whether he considered the root cause of LDI’s popularity, the accounting standards that required sponsors to account for pensions on their balance sheet on a mark to market basis. Apparently, Nigel Wilson hadn’t much considered this, surprising as he is an accountant. This did not stop him however from lamenting the lack of growth assets in the funded pension system.
At this point, a disinterested observer might have concluded that Wilson would be arguing for a return to the days when DB pension schemes returned to taking a long-term view, but this was not the case. That observer would be wrong as Wilson purred that defined benefit schemes were heading in short course to L&G for PRT – Pension Risk Transfer.
One committee member pointed to the local Government Pension Scheme, that had not adopted LDI and was investing in growth assets. It would seem that the Local Government Pension Scheme is not likely to seek buy-out from any insurer soon.
The Chair reminded the Committee that the Government had just announced a relaxation in the solvency rules that would make buy-out even better news for L&G.
“Not before time” –
chirped Wilson, who was then pressed as to whether this would bring down buy-out prices. Wilson valiantly argued that as LDI had wiped 20% of the assets he could expect to take on, he suspected that it would enable L&G not to put prices up.
There was more of this knockabout stuff to come as the Committee pressed him on asset management margins. Wilson , who has made it clear that his asset management unit was not delivering the goods on margin, went into overdrive at this point. Clearly he was not a happy man having his thin margins challenged just where his margins hurt him most.
He then mounted his soapbox to demand that he could use DC to build Britain back better, bizarrely by allowing DC to invest in growth assets (it does). It seems that having consigned DB to his buy-out team, having taken a £12m pa hit from reduced profit from LDI , DC is the only remaining area in which his asset management department can make more money.
Making money as an asset manager from DC workplace pensions is hard. And it’s hard to see how DC margins will increase without further Government intervention. Wilson claims that L&G now manage 56% of our DC assets but in a price dominated savings market, perhaps he would be better placed using the insurer’s undoubted skills providing annuities, to help meet the need for more affordable ways for DC savers to buy CDC pensions.
As for LDI, I sensed from the Committee’s reaction , that that particular swan has flown.