​Fears of a repeat of the 2022 gilt market crisis, which saw rising yields trigger a liquidity squeeze for many defined benefit (DB) pension schemes, are "not justified", according to partner and head of DB endgame strategy at Barnet Waddingham, Ian Mills.

After then-UK chancellor, Kwasi Kwarteng announced a series of expansionary fiscal measures in Autumn 2022, including some supply-side policies and tax cuts, markets reacted negatively, with the 30-year gilt yield spiking 120 basis points over three days.

The Bank of England was forced to step in and purchase long-dated gilts to ensure proper market functioning.

Following the government’s Budget announcement on Wednesday, the markets once again saw a "steady rise" in gilt yields, but Mills said that this time it does not represent a cause for concern.

"The Chancellor has indicated an intention to issue more gilts than previously expected by the market and the memory of the 2022 minibudget is still fresh," he explained. "However, three key differences this time around reduce the likelihood of similar repercussions:

"The Chancellor involved the OBR in this proces, so that investors have independent analysis of the impact of the budget on which to base their decisions. In 2022, the lack of this analysis led to an uncertainty premium feeding into yields.

"Gilt yields had also been rising significantly in the months preceding the 2022 budget, whereas this time they were not materially different to six months prior. In 2022, the rise in yields was already starting to squeeze some schemes' liquidity even before the budget."

Finally, Mills claimed that DB schemes and their asset managers have “learnt their lesson”.

“They generally went into this budget with far higher targeted levels of liquidity than they did in 2022,” he added.

The big question, Mills suggested, is who will buy the extra guilts issued by Reeves?

“For the last twenty years or so, UK DB schemes have been buying gilts at almost any price," he continued.

"They are, however, now generally very well-funded and own pretty much all the gilts they will ever want to buy.

"The danger for the Treasury here is that when a DB scheme buys-out most of those gilts ultimately are sold (either by the scheme to pay a cash premium) or by the insurer as they redeploy assets into higher-yielding investments. This could apply further upward pressure on yields from declining pension scheme demand over the next few years.

"Our view is that this will be felt most keenly in the long end of the curve, especially in the index-linked market where there are few other natural buyers."

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