Industry experts have suggested that the impact of the recent gilt yield surge will likely be contained for UK pension schemes, as improvements since the 2022 yield crisis mean schemes are better prepared to handle fluctuations.

The UK 10-year gilt yield recently hit its highest level since the financial crisis in 2008, while the 30-year yield is at its highest since 1998, prompting concerns about the road to recovery for the UK economy.

The latest data showed that the 10-year gilt yield had risen to 4.79 per cent, while the 30-year yield had increased to 5.35 per cent amid an intensified global government bond selloff.

This prompted fiscal concerns, as experts questioned how Chancellor, Rachel Reeves will respond as she looks to continue with her aim of ensuring economic growth, particularly given the UK government’s already limited budgetary headroom.

However, the impact on pension schemes is likely to be contained, as Broadstone head of policy, David Brooks, noted that while liability-driven investment (LDI) funds have been actively managing their cash positions in response to this shifting investor sentiment and market volatility, there don’t seem to be any systemic issues at play.

"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 continued.

This was echoed by Barnett Waddingham chief investment officer, Matt Tickle, who said that, "given the global movements and pace of the shift, we do not believe the current situation is akin to that experienced in September 2022 during the gilt-crisis on the back of the Truss-Kwarteng budget".

"However, we do not believe schemes should be complacent," he clarified. "We recommend schemes review their collateral adequacy and ensure they can withstand further yield rises from their current, elevated, levels."

Brooks also suggested that 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," he pointed out.

“In addition, trustees may need to review commutation factors to ensure fair value and potentially review covenant positions where sponsor’s borrowing costs have risen.”

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