LDI Crisis 3-year anniversary: The system feels safer but only time will tell

Investment

Where do UK pensions stand today?

Three years on from the Liz Truss mini-budget, UK pension schemes are in a much stronger position. Higher interest rates and the recovery in risk assets since 2022 have boosted funding levels, giving many trustees the chance to lock in the gains. Schemes are holding more gilts and high-quality credit, while reducing leverage in their liability-driven investment portfolios. The new funding code will only accelerate this shift towards greater stability. Furthermore, the conversation has moved on from how to get to full funding to a conversation of surplus sharing between sponsor and members and run-on.

But challenges remain. Some schemes are still tied up in private assets that take years to mature. While they could sell at a discount, most are choosing to wait it out. In the meantime, liquidity is being rebuilt, and portfolios are being adjusted, but structural constraints remain.

LDI: Buffers, collateral and new realities

LDI looks different today. Schemes now run with much larger buffers to avoid the kind of forced gilt sales that dominated headlines in 2022. The question is whether these safeguards are more than just a comfort blanket. In the last bout of volatility, managers often asked for more collateral rather than relying on buffers. Repurchase agreements offer an extra backstop, but whether the system can truly withstand another shock remains to be seen.

Systemic resilience and the gilt market: A fragile balance

The bigger picture points to the UK’s financing challenge. As defined benefit schemes move towards insurance, the long-term buying base for gilts is shrinking. Insurers remain significant buyers of gilts, but more tactical than permanent. If gilt demand falters, the ripple effects could spread far beyond pensions.

The system feels safer today, but the real test will be how these new safeguards perform in the event of another bond crisis. Understanding how and when buffers can be used will be key to avoiding history repeating itself.