DB schemes likely well‑positioned to tackle gilt yields rise

If the rise in gilt yields is sustained or continues, we will see some asset rebalancing into LDI to top up prudent buffers. In particular, schemes will need to be careful not to be forced sellers of assets that may have recently experienced a price dip. And schemes with a well-diversified pool of assets to draw upon will likely fare better.

The impact for many schemes of rising gilt yields will be muted by rising inflation expectations, with pension schemes grateful for their high inflation-hedge ratios. Regardless of how the conflict unfolds in the coming days and weeks, the permanent damage to infrastructure will likely have inflationary effects and likely cause increases to inflation-linked pension payments. However, with some of these inflationary increases capped, trustees of DB schemes will be reassessing their inflation hedges to ensure they remain fit for purpose in a higher inflationary environment. The likely market reaction will be for some schemes to reduce some of their inflation hedges, helping to keep a lid on the cost of hedging inflation and avoiding any spiral effects.