Budget Breeze or Gilt Yield Storm? What Schemes Should Watch

Key Takeaways:

• Defined benefit schemes: Higher yields have strengthened funding levels, but leverage, liquidity, and collateral management remain critical.
  

• Defined contribution schemes: With credit spreads near lows and member confidence at record lows, default strategies and communication need revisiting. 

• Governance in focus: Strong oversight and clear long-term direction matter more than ever as the Budget approaches and market resilience is tested again.

As the November Budget approaches, markets are once again holding their breath. With sizeable tax rises expected and borrowing pressures still present, even a small surprise could see gilt yields shift and not in a direction pension schemes would welcome.

There’s no shortage of speculation around possible measures that could affect the pensions and savings landscape, including: reductions in tax-free cash allowances, limits on salary sacrifice, the potential shift from National Insurance to income tax for pensioners, or changes to ISA limits. 

Each carries implications not just for individuals but for the broader savings ecosystem, including defined benefit and defined contribution pension schemes. Recent data from Nucleus’s UK Retirement Confidence Index¹ underlines how retirement confidence among UK adults has fallen to its lowest level on record. The constant speculation around pensions and tax changes could unsettle savers into early drawdowns.

We’ve been here before — and not just in 2022. The October 2024 Budget which raised employer National Insurance, pushed 20-year gilt yields above 5% for most of 2025, even topping 5.5% at points. By contrast, they were as low as 4.4% on 1 October 2024.  

This time, the twin risks are familiar:

Pre-Budget nerves: Investors may demand a higher premium if the government’s fiscal sums appear stretched, driving yields higher in anticipation.

Post-Budget surprises: If policies are perceived as inflationary or politically fragile, the gilt market could once again react sharply.

Beyond the domestic narrative, global macro trends such as slowing growth in the U.S, and changing expectations around AI-led productivity, could contribute to market pressures that extend beyond just gilt yields. 

Higher yields have undoubtedly been kind to funding levels, but that doesn’t mean clear skies lie ahead. Many schemes have reached or exceeded funding targets, yet the combination of elevated yields, persistent volatility, and liquidity considerations calls for careful planning.

1. Leveraged LDI and elevated yields: Since the events of 2022, most schemes have rebuilt their hedging positions with greater resilience. However, higher yields can still test those defences. Margin calls can reappear quickly if volatility spikes, and we’ve already seen some managers holding excess collateral as a precaution.

2. Early retirements and cash-free lump sums: Any changes to tax or pension allowances could prompt members to retire earlier or withdraw benefits sooner. That could tighten cashflow positions just when schemes most need liquidity to meet collateral or benefit outflows.

3. Banking returns: With global equity markets performing strongly through 2025, and possibly some schemes sitting on meaningful gains, they may want to consider banking them, depending on their stance on equities.

For defined contribution schemes, the key question is whether default strategies remain well-positioned for this environment. The combination of tight credit spreads, elevated gilt yields, and shifting inflation dynamics makes this a good moment for a strategic sense-check.

1. Low credit spreads: Investment-grade credit remains a staple in many default funds, but current spreads offer limited cushion, with returns potentially not justifying the risk. However, should global conditions soften, widening spreads could provide attractive entry points later in the cycle.

2. Diversifiers matter: Multi-asset, real-asset and inflation-linked strategies can help smooth outcomes if yields rise or volatility returns. Having a well-balanced mix across asset types is not just a diversification story; it’s a resilience one too.

3. Member behaviour: Headlines about tax or pension changes often prompt members to make quick, emotional decisions. Clear, consistent communication can help prevent short-term noise from derailing long-term investment outcomes, especially at times when confidence is easily shaken.

The fall in retirement confidence, as highlighted by the Nucleus survey, is a reminder that policy volatility has a human cost as well as a market one. Every Budget that shifts the goalposts makes it harder for savers and trustees alike to plan with conviction. This Budget could be another test of market discipline and trustee readiness.

Whether it brings a gentle breeze or another gilt storm, the message is simple: check your sails and tighten the ropes, because good governance beats good guessing.

[1] (Pensions Age, n.d.)

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.