Defined benefit (DB) pension scheme liabilities are estimated to have fallen by around 5 per cent since the onset of conflict in Iran this year, according to XPS Group.

Since 28 February 2026, XPS Group calculated that DB schemes’ liabilities had reduced by approximately £50bn.

The decline had been driven by the UK bond market’s reaction to the conflict, while the impact of higher inflation expectations had not yet taken hold.

XPS Group partner, Adam Gillespie, said that while renewed inflation risk was bad news for individuals and government finances, the picture was more nuanced for DB schemes.

“XPS estimates that liabilities on a long-term funding basis have fallen by approximately 5 per cent since 28 February, equivalent to around £50bn,” Gillespie noted.

“Long-dated gilt yields, the primary driver of liability valuations, have risen sharply, with the 10-year gilt reaching almost 5 per cent on 20 March, its highest level since 2008.

“Rising yields reduce the present value of liabilities more quickly than higher inflation expectations increase them, meaning that for most schemes, the net effect is a material reduction in liabilities.”

How this change translated into surplus depended on a scheme’s exposure to risky assets, but XPS expected many to have seen their positions improve further.

Gillespie said this ‘sharpened’ the ongoing debate around surplus release, as one of the areas trustees consider when looking at how surplus can benefit members is how member benefits have been affected by increases in the cost of living.

He added that these recent market moves had created additional challenges for liability hedging strategies, compounding existing gilt market fragmentation.

“Two issues stand out: higher inflation can leave schemes inadvertently overhedged; and curve shape changes can have a significant second-order impact on hedge effectiveness,” Gillespie said.

“XPS's research shows that even for a modest £100m scheme, the difference between a highly robust and a less robust hedge can result in losses of around £600,000 per year - and significantly more in conditions like these.”

Trustees and sponsors were urged to review whether their liability hedges remained at the right level and protected against further movements in yields and inflation.

Meanwhile, XPS Group head of defined contribution (DC) investment, Mark Seale, highlighted that the prospect of higher future inflation was a “blow” for UK DC pension savers.

“Younger members have enjoyed strong global equity returns over the last three years, but a period of persistently higher inflation would make retirement targets harder to achieve without changes to contributions or investment strategy,” he said.

“For older savers already drawing an income, higher inflation means larger withdrawals are needed just to maintain purchasing power.

"Combined with the elevated market volatility we’re seeing, this significantly increases the risk of running down drawdown pots too quickly and brings into focus the risk DC retirees face with pound cost ravaging.”

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