From the early 2000s, yields on real and nominal government bonds declined steadily, with occasional periods of volatility. However, the latter part of 2022 saw extreme movements in government bond yields, driven in part by the “mini-budget” of the Liz Truss administration that was put forward on 23 September 2022. The resulting market disruption forced the Bank of England to intervene and exposed vulnerabilities in pension scheme investment strategies, particularly those reliant on leveraged LDI. Since then, government bond yields have remained at a higher level. This has led to a material reduction in the present value of pension scheme liabilities (an estimate of how much it will cost to pay members’ benefits), often exceeding asset losses, resulting in improved funding positions across many DB schemes. The significant asset losses incurred by pension schemes, particularly those heavily invested in bond-like assets, were mainly due to the inverse relationship between yields and bond prices. These developments have prompted trustees and consultants to carefully reassess whether existing strategies remain aligned with long-term objectives given the current economy. De-risking refers to the gradual reduction of investment risk as pension schemes approach their endgame - typically a buyout with an insurance company or self-sufficiency/run-on. Prior to the disruption in 2022, many trustees had already begun considering and implementing de-risking plans, particularly in response to increased equity exposure following the post-pandemic market rebound. LDI solutions became central to this approach; their leveraged nature allowed schemes to maintain hedges (typically of interest rates and inflation) while allocating excess capital to so-called “growth” assets. This gave rise to “LDI plus” portfolios, which combined liability hedging with diversified growth exposure. By 2021, the UK LDI market was estimated to be worth around £1.5 trillion, reflecting widespread adoption.

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