Fiscal policy, international monetary policy, pensions frameworks, investment strategies, even contract documentation in areas like reinsurance quota shares - the impact of the brief but potentially disastrous LDI Crisis in the UK is not hard to find one year on.

Anecdotally, words like 'counterparty risk' and 'liquidity' seem to come up in a greater number of conversations across our office than might have been the case in the run-up to autumn 2023, and it would be callous not to mention the restructuring which occurred at a number of institutional asset managers as their revenues were hit not only by the crisis itself, but the aftermath in the form of higher rates which eroded the value of the defined benefit pension pots which they manage.

To recap, in September 2023, the Chancellor of the Exchequer announced changes to fiscal policy which led to a dramatic increase in gilt yields and a corresponding decline in their value. Under obligation to rebalance pension scheme portfolios, LDI asset managers called on their clients to provide collateral on margin calls in the instruments employed to leverage or hedge their exposure to UK gilts. Since gilts are among the most liquid of financial instruments, they themselves were the first to be sold and a downward spiral ensued, prompting schemes to sell other assets which could provide the monetisation needed to protect their portfolios.  The cost to the UK pensions system may be hard to determine, since it's difficult to know which assets were sold at the height of the panic before the Bank of England's successful intervention.

New capital buffers, stress tests and trustee advice around appropriate levels of leverage have been introduced by the Pensions Regulator, whilst there's been a tempering of leverage applied overall - and a higher priority placed upon identifying and maintaining the assets which can be monetised by pension schemes in the event of a problem. Across the retirement industry, annuity funds have benefited, as trustees and corporate sponsors seek to avoid any possibility of a recurrence, whilst the additional funding gained from higher rates has moved more schemes into the sort of levels which make buy-outs attractive - prompting a bumper year for the PRT sector.  That in turn has impacted capital flows into the bulk annuity market, resulting in new entrants, with rumours of more to come in the form of patient capital providers busily 'running the numbers' on UK Bulks business.  Funded reinsurance processes have gained from the fallout, as annuity providers seek new sources of capital (albeit accompanied by stringent collateral requirements attached to the asset pools involved).

But the Credit markets have held up, and they arguably did a good job of supporting Rates investors at a key point in the LDI crisis (according to some reports a whopping £15bn in ABS was sold off in three weeks by pension schemes and other investors), before demonstrating their flexibility over the course of the year which has followed: ABS markets have tightened a touch but their inflation/floating rates linkages have maintained spread over Rates despite currently high issuance. On a micro level, lending standards have tightened but credit quality itself remains high, supported by good levels of employment overall in the US and other western markets, whilst distressed credit has remained at low levels across the western economies.

A year on from the day that a portfolio manager friend told me that his morning had been "worse than the day Lehman went down" there's definitely been a renewed focus on liquidity, but it looks like some positives can be taken...