Gilt Yields Spike – Risks and Opportunities for Pension Schemes

Key Takeaways:

• Gilt yields are at multi-decade highs, creating both risks and opportunities
• DB schemes: Elevated gilt yields improve funding positions and create a clear opportunity to increase hedging
• DC schemes: Default funds should consider rotating from cash into gilts 
• Schemes with fiduciary managers or outsourced CIOs can lean on their ability to manage risks and take advantage of tactical opportunities

On 2 September 2025, UK long-dated gilt yields (30-year) spiked to their highest level since 1998, with the surge dragging the pound to its weakest level against USD and EUR since April.

For context, the last time gilt yields were this high, people were still excited about dial-up internet and the Spice Girls were topping the charts.

Another piece of history investors may want to avoid reliving is the 2022 gilt crisis. With a jittery pound and an Autumn Budget rumoured to bring fresh taxes, the government faces a considerable task in restoring confidence in its public finances.

In this uncertain environment, here is our breakdown of what we think are the risk and opportunities for UK pension schemes.

Governance first: Amid spiking gilt yields, strong governance is critical. Collateral waterfalls should be reviewed regularly, and processes for posting collateral must be watertight.

Seize opportunities: Higher yields are reducing funding deficits. Underfunded schemes that have not hedged interest rate and inflation risk have already benefitted, but with 30-year gilt yields elevated, there is now a clear opportunity to increase hedging. Our house view is that the fair value of long gilts lies below 5%.

Rethink fixed income: With investment-grade credit spreads tightening below 80 basis points, the scope for value is limited. The balance between spreads and duration should be a key consideration in growth portfolios.

Risk management under the microscope: In the current environment, default funds require closer scrutiny. It is important to assess what is hedged - whether currency, rates, or inflation - and to evaluate how exposed members are to market volatility. This is the moment to stress-test those assumptions.

From cash to gilts: With gilt yields now attractive, the argument for rotating out of cash is strong. Both nominal and index-linked gilts can add value, particularly given that many default strategies tilted heavily towards cash when yields were much lower.

Volatility is here to stay and so is the focus on risk management. Schemes with fiduciary managers or outsourced CIOs can lean on both their ability to manage risks and take advantage of tactical opportunities. Whether delegated or not, the mantra remains the same:

• Do not overreact
• Follow a clear process
• Balance short-term risks with long-term objectives

The current environment presents both risks and opportunities. Elevated gilt yields, tight credit spreads, and shifting currency dynamics demand discipline and clarity of purpose. Those who stay grounded in process, governance, and strategy will be best placed to turn today’s turbulence into tomorrow’s advantage.

For Professional Clients only. Capital at Risk. Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.