Pension schemes in ‘robust position’ to deal with market fluctuations

Pension schemes are in a “robust position” to deal with market fluctuations, an industry body has said.

The pound fell to a fresh 14-month low on Monday, while UK government bonds, also known as gilts, continued to see 10-year yields hit highs not seen since 2008.

Yields are a key indicator of market confidence, moving inversely to bond prices.

There has been speculation over potential impacts for pensions from the gilt market rout, as well as mortgages, with comparisons being drawn with the fallout from former prime minister Liz Truss’s 2022 mini-budget when the pound was sent crashing due to an acute sell-off in gilts.

Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association (PLSA), said: “We are not experiencing the rapid and disorderly market conditions that caused the last gilts crisis.

“As gilt yields rise or fall pension funds will typically adjust their collateral holdings. Given recent rises, and in keeping with guidance from regulators following the mini-budget crisis, schemes are required to hold increased buffers to withstand market volatility – taking these steps is the prudent thing to do.

“Overall, DB (defined benefit) pension schemes are currently in significant funding surplus, and a robust position to deal with market fluctuations.”

Some other parallels are also being drawn with the impacts of the mini-budget – which could be positive for people looking to buy an annuity, which guarantees an income in retirement.

As the value of gilts falls the yield from them increases, pushing up annuity rates.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: “The turmoil in the bond markets has caused annuity incomes to soar, giving an extra boost to a market that has already enjoyed a stellar year.

“The latest data shows a 65-year-old with a £100,000 pension can now get up to £7,425 a year from a single life level annuity with a five-year guarantee (which means the annuity will be paid out for the guaranteed period even if someone dies). This is up from £7,235 a year last week and up a whopping 48% on the £5,003 that was on offer this time three years ago.

“We could see further income rises in the weeks to follow and this could push incomes up to the highs we saw in the aftermath of the mini-budget.

“Annuities continue to provide great value, and we can expect to see interest in them continue to increase, with many retirees deciding that now is the time to take the plunge and get a guaranteed income for life.

“However, it is important to look before you leap. Once bought, an annuity cannot be unwound and different providers offer different rates. If you take the first quote offered without checking the rest of the market, you may find you’ve made a costly mistake.”

She added: “You also don’t need to annuitise all your pensions at the same time if this doesn’t work for you. You can take a flexible approach and annuitise in stages throughout your retirement as your needs evolve.

“This means your remaining pot can remain invested in income drawdown where it can grow while you get the potential to take advantage of higher annuity incomes as you age.”

Looking at the mortgage market, Nicholas Mendes, mortgage technical manager at John Charcol said there had been a “mixed picture” over the past week.

He said: “While some lenders have begun to edge rates upwards in response to rising swap rates, others have held back, likely aiming to avoid unsettling borrowers or the market with knee-jerk reactions.

“That said, the upward pressure on rates is undeniable. Swap rates, which heavily influence the pricing of fixed-rate mortgages, have been creeping up.

“With the margin between these and the most competitive mortgage deals narrowing, it seems increasingly likely that rates will rise further if current trends persist.

“This pressure is closely tied to movements in gilt yields. Increased government borrowing and ongoing economic uncertainty have pushed gilt yields higher, which in turn drives up swap rates. Lenders are absorbing these increased costs for now, but they can only do so for a limited time before being forced to adjust their mortgage products.”

Speaking about why mortgage rates have not risen as sharply as they did following the mini-budget, Mr Mendes said: “The difference lies in the nature of the events.

“The mini-budget caused a sudden and destabilising shock to market confidence, leading to a rapid rise in gilt yields. In contrast, the current increases reflect broader economic factors such as inflation expectations and global interest rate trends. This has allowed for a more measured response from lenders.”

Frances Haque, chief economist at Santander UK, said: “This month, we’re already seeing swap rates edge up as they respond to volatility in the bond market, caused by an uncertain economic outlook for 2025 both at home and abroad. As such, lenders may well – in the short-term – nudge up pricing to reflect the higher swaps.”

She added: “As it stands, with inflation proving to be more persistent, but with growth weakening, the (Bank of England Monetary Policy Committee) is likely to proceed cautiously. Our own forecasts continue to expect a further four cuts over the course of this year, with base rate ending the year at 3.75%, and remaining between 3-4% for the foreseeable.”

Sarah Coles, head of personal finance, Hargreaves Lansdown said: “Lenders aren’t in a major rush to reprice, partly because they were already wary of bond market movements and had planned their mortgage book accordingly.

“This is in stark contrast to the rapid changes after the mini-budget, which came as a bolt from the blue, and sparked extraordinary volatility that meant lenders struggled to price mortgages at all.

“This time, they’re choosing to wait and see whether the bond market has over-reacted to news out of the US, and eases off.

“Having said that, if you have a remortgage looming, it’s not worth waiting to see what happens. It’s get a quote sooner rather than later, so you have a rate locked in. If rates then fall before you need the new deal, you can always shop around.”