Whilst individuals across the UK have been negatively affected by the Bank of England’s rapid change in borrowing rates, something of a paradox has been playing out in pensions de-risking market, which is in rude health: As the gilt rates from which their future liabilities are discounted has risen, so too have the funding positions of many large defined benefit schemes. This has taken many which previously could not afford the comparative ‘luxury’ achieved by ridding their corporate balance sheets of pensions risk, into a funding position which now makes a full buy-out possible.

Consequently, the insurer-led buyout market has never been more active. The effect has of course been compounded by corresponding falls in the asset values of bond portfolios - which are measured annually - whilst other schemes which embraced LDI strategies are cautious about persevering in an investment which at one point in 2022 faced a potentially existential liquidity threat.

The effect of DB schemes on UK corporates has been felt over the past couple of decades, with over £500bn being paid into schemes to meet the outflows required to pay out beneficiaries. As a result, UK plc has been contained by a hard ‘pensions-ceiling’; limiting wage-growth and investment into wider business, posing a tripping-hazard to takeovers and mergers and distracting senior management from the pursuit of growth. The Currys-Dixon merger is highlighted by FT columnist, Johnathan Eley, as a pertinent example of this, with Currys having to pump an additional £691mn (from 2020 to 2029) into Dixon’s legacy scheme as to meet liabilities. Contextually, Currys market cap is £625mn and the electrical retailer is forecast to make £100mn in pre-tax profit this year.

The recent swift rise in rates has reduced strain on DB schemes due to the way in which funding and deficits are calculated (this relies on gilt yields – for every 25bps fall in a schemes discount rate, 3-4% is added in liabilities). Therefore, by definition, increases in gilt yields from an almost ‘rateless’ environment has accelerated the transition of schemes sitting in deficit to surplus, in a meteoric pivot. The Pension Protection Fund, which protects funds from falling into insolvency, notes that the number of DB schemes in deficit in February ’22 was 3149, whereas in ’23, this number had fallen to 672 – further highlighting the expedition of insurer-driven buyouts.