Ryan FowlerThe recent surge in UK gilt yields, driven by increased Government borrowing costs, has introduced fresh volatility into financial markets, raising concerns for pension schemes across the country. Yields on 10-year Government bonds have climbed to their highest level since 2008, while 30-year bonds are at their highest point since 1998. This sharp rise means borrowing costs for the Government have significantly increased, with potential knock-on effects for pension scheme funding and risk management.
David Brooks, head of policy at independent consultancy Broadstone, said the bond market sell-off has led to “fresh volatility” but noted that improvements in the management of liability-driven investment (LDI) strategies since the 2022 yield crisis have bolstered the sector’s resilience. He commented: “The recent bond market sell-off, driven by news of record UK Government borrowing costs, has seen gilt yields surge and introduced fresh volatility into UK markets.”
Brooks added that LDI funds have been actively managing their cash positions in response to shifting investor sentiment and market fluctuations. However, he pointed out that systemic risks appear to be under control. “Improvements to collateral management and waterfall structures since the 2022 yield crisis have significantly strengthened market resilience and ensured schemes are better prepared to handle fluctuations,” he said.
Despite the increased market volatility, the current high-yield environment offers potential opportunities for pension schemes to reassess and de-risk. Brooks advised trustees and sponsors to remain vigilant: “Trustees and sponsors should continue to focus on monitoring hedging levels, maintaining adequate collateral buffers, and rebalancing portfolios where appropriate. The higher-yield environment also creates opportunities to review de-risking strategies, particularly for schemes that have benefited from improved funding positions.”
In addition to monitoring hedging and collateral, Brooks highlighted the need for trustees to consider reviewing commutation factors to ensure fair value for members and to reassess covenant positions if sponsor borrowing costs have risen significantly.
The surge in gilt yields has coincided with a decline in the pound, which has dropped from $1.25 to $1.23 against the dollar over the past few days, further reflecting the uncertain economic environment.
