How a gilt rout made Britain's pension schemes rich

Gilt yields rise, so the promises in company pension schemes are worth less today, so schemes that were short of money are now sitting on a surplus of nearly £281bn, and the insurers who take those promises on get paid to do it.

A pension promise is a long list of future payments

A traditional company pension, the defined-benefit kind that most private firms closed to new joiners years ago, is a stack of promises: pay this person so much a month, rising with inflation, for the rest of their life. The scheme's liability is not the total of those payments but what they are worth today, and that is worked out by discounting them at the yield on government bonds, the gilts the scheme would buy to meet them.

That single rule does the work. When gilt yields fall, as they did for most of the 2010s, the same promises are worth more today and schemes fall into deficit. When yields rise, the same promises shrink in today's money and the scheme looks richer, even though not a penny of what any pensioner will receive has changed.

What the gilt market did

The yield on the 10-year gilt reached 5.44 per cent on 28 September 2026, its highest since July 2007, and the 30-year gilt passed 6 per cent on 1 October. Inflation driven by this year's oil shock and the prospect of higher Bank of England rates pushed them there. Those same yields are what make mortgages and government borrowing dearer, which is why they are usually reported as bad news.

For pension schemes the arithmetic ran the other way. The Pension Protection Fund's 7800 index, which tracks 4,838 schemes, put their combined liabilities at £801.2bn at the end of September 2026 against assets of £1,081.9bn. The PPF described liabilities as at their lowest since 2007. The surplus was £280.7bn and the funding ratio 135 per cent, up from £273.6bn a month earlier. The schemes still in deficit owed only £20.5bn between them. The Pensions Regulator estimates that around 60 per cent of schemes could now afford to hand every promise to an insurer, and 80 per cent are in surplus on the lower 'low dependency' test.

What trustees do with a surplus

A scheme in surplus can pay an insurer a lump sum to take over its promises for good, a transaction the industry calls a buy-in or buy-out. Higher yields make this cheaper from both sides at once: the trustees have more money relative to the promises, and the insurer, discounting the same payments at the same yields, charges less for them. The consultancy LCP counted more than £40bn of such deals in 2025 and forecast £40bn to £55bn for 2026, against a record of £49.1bn in 2023, with eleven insurers competing and roughly 150,000 scheme members expected to move to an insurer this year. The first half of 2026 was quieter than the headlines suggest, at £10.2bn across 138 deals according to Aon, with larger deals expected in the second half.

The insurer earns its living on the gap. It takes the lump sum, invests it in gilts, corporate bonds and private loans that yield more than the pensions it has promised to pay, and collects that spread for thirty years or more. Higher yields also flatter the insurers' own balance sheets, because the capital rules measure their liabilities the same way, so the same rise in gilt yields that cuts a scheme's liabilities also leaves the insurer with more spare capital than its rules require.

The same machine in a single household

The retail version of the same deal is an annuity, where a person hands a pension pot to an insurer in exchange for an income for life. Because the insurer prices it off gilt yields, a healthy 66-year-old with a £300,000 pot could secure about £23,205 a year in early 2026, a rate of roughly 7.7 per cent, where five years earlier the same pot secured about £13,500. Sales followed the rates: individual annuity purchases reached a record £7.4bn in 2025 according to the Association of British Insurers, the average pot passed £84,000, and purchases over £250,000 rose 31 per cent. From 6 April 2027 unused pension pots are due to fall within inheritance tax, which gives retirees a further reason to turn a pot into income.

The gainers are the sponsoring employers, who can stop topping up schemes and, under the Pension Schemes Act 2026, will from April 2027 be able to share out surplus with members; the insurers, who earn a spread on every promise they take over and have more spare capital; and retirees buying annuities, who get far more income per pound saved than a decade ago. The payers are everyone on the other side of the same yields: mortgage borrowers, the Treasury's interest bill, and anyone whose pension pot is still invested in bonds whose prices have fallen. The machine runs for as long as gilt yields stay high; a sharp fall in yields would shrink the surpluses again, though most large schemes now hedge against exactly that.

This piece was researched with AI from the public sources named and written up and checked by Michael Rossi before it went up. It describes how one thing moves another; it names no investment and is not financial advice.

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