Efficient ways for pension schemes to adapt to higher gilt yields | Insight Investment

Higher gilt yields are here to stay (2 min)

David Jamieson, our Senior Market Strategist, explains the forces that have led to higher gilt yields over the last 12-18 months and why he believes that higher yields will remain.

• The main driver of higher gilt yields since early 2022 is central bank policy of rising short-term rates to curb inflation.
• Since September 2022, the Bank of England has been selling bonds previously bought to support the government’s large COVID borrowing.
• This reintegration of the Bank’s gilt holdings at a time when the Government is expected to borrow a further £1trn in the next 5 years should mean higher yields in the future.

How resilient are defined benefit schemes to a further rise in yields? (2 min)

Joe Rattenbury, Solution Designer at Insight, outlines how pension schemes have improved the resilience of their LDI programmes and how a focus on highly liquid fixed income strategies can increase this resilience further.

• Pension schemes are in a better place to withstand market stress as experienced last year, having rebuilt much larger collateral buffers and improved the liquidity of their wider strategy.
• In April 2023, the Pensions Regulator provided clear guidance for pension schemes to maintain the higher buffers for the long term, providing greater certainty to update wider investment strategies.
• These changes have put greater focus on assets, such as highly liquid bonds, that can play multiple roles within a scheme’s strategy – contributing towards both resilience to yield rises and efficiency in generating returns.

What is credit collateralisation and how can it help schemes with resilience to higher gilt yields? (3 min)

Hannah Ni Riain, Solution Designer at Insight, explains how Insight has successfully implemented ways for our clients to use corporate bonds as collateral for liability hedges.

• Credit collateralisation allows clients to use corporate bonds to generate the cash required to bolster LDI collateral buffers, increasing resilience to gilt yield rises, while retaining the economic exposure to these bonds.
• This improves investment efficiency by widening the role corporate bonds can play: hedging, matching cashflows, offering attractive spread above gilts, and now providing collateral without needing to sell.
• Our approach helps to largely mitigate liquidity, settlement, governance, forced selling and whipsawing risks at a palatable cost compared to expensive alternatives.