Gilt yield rises

Should we be concerned and what action should trustees take?

Long-dated gilt yields have recently reached levels not seen since 2008. In this note we consider why and what should trustees do about it?

Gilt yields have been rising over 2024, particularly ahead of the Autumn Budget, and this trend has continued into 2025, albeit yields have begun to reduce over the last two weeks.  This is shown in the chart below: 

Source: Bank of England

The Autumn Budget increased market expectations around the amount the UK would need to borrow through issuing gilts, which combined with weaker forecasted economic growth and residual inflation concerns, led to the higher yields.  However, the extent of these rises should be put into context.  Ther below chart shows the change in gilts yields since 2020 and the rapid increase over 2022 due to inflationary pressures and a notable spike in September 2022 following the infamous ‘mini-budget’.

Source: Bank of England

What does this mean for trustees?

Defined benefit pension schemes should see a decrease in the value placed on their liabilities, given these are normally inversely linked to long-dated gilt yields.  However, many schemes are invested in a way that the scheme assets also move in line with long-dated gilt yields.  This is to hedge liabilities and reduce volatility of the funding position (surplus or deficit).

This means many trustees will also see the value of their scheme’s assets drop in value.  Where a scheme is appropriately hedged, this should not be a huge concern as the scheme liabilities will also have dropped.  However, the asset allocation may now vary from target, with schemes potentially now being overweight to growth assets.  Schemes with LDI solutions may need to top-up their collateral pools given these will have reduced.  We would suggest trustees speak to their investment consultants to understand if a rebalance is required.

Schemes with only limited liability hedging may have seen an improvement in funding level as a result of the fall in liabilities.  This could be an opportunity to derisk the scheme’s investment strategy and increase the amount of liability hedging. We suggest schemes in this position speak with their actuary or investment consultant to understand the change in funding level.

Atkin view

Whilst the recent rises in gilt yields have been notable and been much discussed in the financial press, the moves are far smaller and more gradual in nature than those seen in 2022 (especially around the time of the mini-budget).  Therefore, there is no need to panic. Nevertheless, we suggest trustees consider how the moves may have affected their scheme and seek advice as appropriate.