Pension scheme trustees have been urged to “brace” for a new market environment, after an “unprecedented surge” in gilt yields, which is expected to have significantly improve defined benefit (DB) pension scheme funding levels.

UK 10-year gilt yields passed 4 per cent today (26 September), having also previously increased to just over 3.8 per cent before the Chancellor stood up to deliver his mini-Budget, followed by further increases amid market reaction.

Industry experts previously suggested that the high levels of government borrowing announced in the mini-Budget could drive up interest rates and reduce DB pension deficits, urging trustees to lock in financial gains while they could.

XPS Pensions chief investment officer, Simeon Willis, also noted that the “unprecedented surge” in gilt yields seen since will have improved UK pension scheme funding levels by “a greater quantum than a whole year’s deficit removal contributions”.

However, Willis warned that market conditions are changing "at pace", with the factors influencing them streching "far beyond the pensions industry".

“We are starting to see liability driven investment (LDI) managers flag new emergency collateral calls, a trend that is likely to continue in the coming days," he explained.

"Agility is key, and schemes should be braced as we move to a new market environment."

In light of this, Willis suggested that schemes using LDI should review their plans and assess whether further action is required to maintain a diverse portfolio, be ready for any further LDI collateral calls and maintain, or even increase, hedging to lock in these improvements.

The Pensions Regulator lead investment consultant, Fred Berry, also previously warned trustees to remain vigilant to investment risk earlier this year, amid concerns that some schemes may be under-prepared for LDI collateral calls, after "years of falling interest rates in which LDI funds were paying collateral back to schemes".

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