Commenting on the impact of volatility in the gilts market and the impact on the de-risking market, Iain Pearce, Senior Risk Transfer Consultant, says:

“The UK has experienced unprecedented volatility in the gilts market in a ten days like no other. The market movements are consistent with extreme scenarios of models commonly used to manage pension scheme risks, and so have put pressure on LDI portfolios. These changes could be good or bad news for pension schemes looking to insure benefits, depending on their current levels of hedging and leverage. Schemes close to buy-out that are well hedged with low levels of leverage may be well placed to weather current market volatility, but may need to refresh their analysis following the material changes in markets. Pension schemes looking to insure a proportion of their liabilities will also need to take another look at their portfolio after the current volatility, which may result in some decisions to reduce the size or defer planned buy-ins. Schemes that are further away from buy-out with low levels of hedging will have seen a rapid improvement in their funding level and are likely to be executing plans to lock in these gains and accelerate their preparations for buy-out. We expect some transactions to slow down and others to accelerate as a result of this volatility.

“Insurers have also been impacted by the volatility following on from the mini-Budget, but schemes can take comfort knowing that the Solvency II Matching Adjustment regime effectively requires insurers to adopt a “buy and hold” cashflow matching strategy and some are likely to have seen an improvement in their solvency coverage ratios. As is often the case, insurers are expected to have been more resilient to market movements than typical pension scheme portfolios.”

Further detail can be found in our blog here.