Liberation Day to 'Relief Wednesday' for UK DB schemes

Key takeaways:

  • Defined Benefit (DB) pension scheme funding levels recovered quickly, reinforcing the importance of avoiding knee-jerk reactions during volatility.
  • With gilt yields shifts, trustees should assess collateral headroom and ensure readiness to meet potential calls while avoiding crystallising losses.
  • This is a timely opportunity to review risk tolerance and ensure portfolios remain aligned with long-term objectives.
     

Tariff clouds finally cleared for the stock market yesterday—at least temporarily—as the S&P 500 posted its best single-day return since 2008. On Thursday, stock markets across Asia, Europe, and the UK saw significant gains, while gilt yields dropped by 10 to 20 basis points.

The sharp global sell-off in equities and bonds has partially reversed within just a week. For UK DB pension schemes, funding levels that appeared to decline, recovered significantly only days later. We believe one of the key risks last week was investor overreaction and failing to consider the broader market context.

DB schemes with triennial valuation dates at the end of March or the first week of April are likely to have crystallised weaker positions for the valuations. This presents a strong case for pragmatism, with a focus on incorporating post-valuation experience into the overall assessment. 

LDI diagnosis

20-year gilt yields have fluctuated between 5% and 5.5% since the beginning of the year. Most leveraged pooled and segregated Liability-Driven Investment (LDI) mandates currently have yield headroom exceeding 350 basis points. 

The key concern for Trustee boards is whether potential collateral calls could crystallise market losses. In this context, adopting a dynamic approach is essential. Trustees must proactively assess how and where to source liquidity if LDI managers request additional collateral.

Re-risk or de-risk?

It is crucial not to overreact during periods of heightened market volatility. Trustees are encouraged to engage with their investment consultant or fiduciary manager to fully understand the rationale behind current and future decision-making. This moment offers a valuable opportunity to reassess risk tolerance, remain focused on long-term objectives, and allow for a structured, disciplined process to guide the way forward.

 
At the same time, investment strategy and portfolio management must remain nimble and responsive. The ability to dynamically re-risk or de-risk in response to evolving market conditions is essential and is one of the key strengths of a well-executed delegated investment approach.
 

Just a blip?

Despite the sharp rebound in markets on Wednesday, trustees should be mindful that the tariff dispute is far from resolved. The broader economic consequences will depend heavily on how future trade policies evolve. Tariffs are just one of several policy areas that warrant close attention. Developments in immigration and taxation policies, for example, are also likely to have far-reaching implications for institutional investors.
 
Looking ahead
 
In this uncertain environment, pension scheme trustees should focus on building and maintaining well-diversified portfolios that are aligned with long-term megatrends across both public and private markets. This will be key to delivering real value and managing through periods of short- to medium-term volatility. 
 
For schemes opting for a run-on or run-off end game objective, such alignment is particularly important. A clear, forward-looking investment approach can help ensure that the endgame journey is both resilient and adaptable to changing market conditions.
 
Similarly, for schemes considering buy-out it will be crucial to navigate this volatility especially as they head closer to price lock portfolios to avoid being knocked off course.

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