Slug: pension-fund-strategies-higher-rates
As of: 13 October 2026

Scope: This article concerns UK occupational defined-benefit (DB) pension schemes only. It addresses assets, liabilities, funding, leveraged LDI collateral and liquidity, governance, and operational risk. It does not cover defined-contribution arrangements, personal pensions, public-service schemes, retail investors or non-UK pension regimes.

Institutional framework, not advice: This is general research for trustees and institutional stakeholders. It is not investment, actuarial, legal, tax, covenant or scheme-specific advice, and it does not recommend an asset allocation, hedge ratio, manager, transaction or endgame solution. A scheme’s rules, member profile, actuarial valuation, employer covenant, liquidity sources, contracts and delegated authorities can materially change the appropriate response.

Main Content

For a UK DB scheme, a higher-for-longer rate environment is not simply a reason to “de-risk” or to assume that a higher funding ratio is secure. The practical response is a five-part institutional framework:

  1. Re-establish the funding and liability picture on the scheme’s relevant bases, rather than treating one aggregate or accounting measure as the answer.
  2. Decide what interest-rate and inflation risk the scheme is deliberately retaining, while recognising that more hedging and leverage can create liquidity demands.
  3. Maintain a tested liquidity plan that covers pensions, expenses, transfers and possible collateral calls at the same time.
  4. Stress the whole operating chain, not just portfolio values: information, decisions, mandates, signatories, dealing cut-offs, settlement and third parties.
  5. Document ownership, limits and escalation, then revisit them when funding, markets, cash flows, covenant or implementation arrangements change.

This sequence matters because higher long-term rates can reduce the present value of DB liabilities, but asset values, hedge effectiveness, collateral needs and the employer’s ability to support risk can move differently. The Pensions Regulator (TPR) has observed that, in aggregate, higher long-term rates improved UK DB funding levels as liability values fell more than asset values. That is a market-level observation, not a conclusion that every scheme has gained equally or is ready for an insurer transaction. 1

The environment has nevertheless changed the questions trustees need to ask. The Pension Protection Fund’s (PPF’s) 2025 Purple Book estimated an aggregate 125.0% s179 funding ratio at 31 March 2025 for its eligible DB universe, while its estimated aggregate full-buy-out ratio was 95.8%. The PPF is clear that these are rolled-forward estimates with assumptions and judgements; s179 broadly relates to the cost of securing PPF-level compensation, rather than full scheme benefits. Aggregate figures therefore provide context, not a funding diagnosis for an individual scheme. 2

Start with the liabilities and funding basis, not the headline yield

Higher yields often reduce the discounted value of promised DB cash flows. That mechanical relationship is one reason funding can improve. But a scheme’s liabilities are not a traded asset with one universally correct price. Technical provisions, the low-dependency funding basis, accounting measures, a buy-in or buy-out estimate, and PPF measures can answer different questions and use different assumptions. The appropriate question is: which basis is being used, what decision is it meant to inform, and which risks remain outside it?

That distinction prevents a common governance error: treating a rise in a reported funding level as permission to take or retain risk without checking the journey plan. TPR’s DB funding code applies to valuation activity with effective dates on or after 22 September 2024. It requires trustees, for the funding and investment strategy, to take account of the objective that assets up to the minimum funding level will be invested in accordance with a low-dependency investment allocation from the relevant date, and to formulate funding and investment journey plans. The code also links the amount of supportable investment risk to the employer covenant, particularly as a scheme becomes significantly mature. 3

A useful board-level funding pack consequently separates at least four views:

  • the actuarial funding position and its sensitivity to rates, inflation, credit and longevity assumptions;
  • the long-term funding and investment strategy, including its relevant date and low-dependency rationale;
  • any insurer-market or endgame affordability view, explicitly labelled as an estimate rather than a promised transaction price; and
  • the liquid-asset and collateral position that determines whether the strategy can actually be operated through stress.

These measures should reconcile conceptually, but they should not be forced to agree numerically. A surplus on one basis may not translate into another, and a well-funded scheme can still have a short-horizon liquidity weakness. Conversely, a scheme that retains growth assets or illiquid cashflow-generating assets may be doing so for reasons that a single funding ratio does not reveal. The governance task is to make those trade-offs explicit and to identify what the employer covenant must absorb if they go wrong.

TPR’s 2026 Annual Funding Statement reported that around 80% of DB schemes were fully funded on a TPR-derived low-dependency basis, while stressing that macroeconomic uncertainty, covenant and near-term liquidity remain relevant. Its message is not that all schemes should follow one endgame path. It is that stronger funding positions should shift attention towards protecting progress and planning for endgame, proportionately to scheme circumstances. 4

Treat the asset strategy as a balance of matching, return and usable liquidity

In a higher-rate environment, matching assets may offer more income and interest-rate sensitivity than they did when yields were lower. That can make an increase in matching exposure or a reduction in return-seeking risk a legitimate subject for scheme-specific advice and decision-making. It does not make either outcome automatic. Trustees still need to determine the cash-flow profile to be matched, the desired rate and inflation hedge, the residual credit and reinvestment risks, expected benefit payments, and the degree of reliance on the sponsoring employer.

The operational constraint is that collateral cannot be met with an attractive long-term asset in theory. It must be met with cash, eligible assets or assets that can reliably become eligible collateral in time. TPR explains that leveraged LDI uses financial instruments to increase exposure to assets such as gilts and fixed-income derivatives, and that collateral demands can change over short periods as interest rates move. LDI can reduce funding-level volatility by matching asset and liability sensitivities, but it adds a need to fund collateral calls promptly. 5

This is why a liquidity budget should be distinct from the strategic asset allocation. It should identify the sources of cash or eligible collateral available in specified time windows, their dealing and settlement mechanics, any market-price sensitivity, legal control over assets and competing uses of the same liquidity. It should also separate the assets thought to be liquid in ordinary conditions from those that are genuinely usable during market stress.

TPR’s funding-code material expects trustees to consider both expected payments and reasonable allowance for unexpected cash needs. It specifically identifies pensions, expenses, cash-equivalent transfer values, death benefits and derivative collateral calls. It says cash-flow needs should be forecast over at least three to six months, including contributions and investment income, with governance that brings new needs to attention promptly. 3

That perspective makes “higher for longer” more than an interest-rate view. It changes prospective income and liability discounting, but it may also change refinancing conditions, asset valuations, employer cash flows and the availability of market liquidity. In practice, the board needs an integrated cash calendar rather than separate investment, benefit-payroll and private-market schedules.

LDI resilience: the important question is whether collateral can arrive on time

Leveraged LDI is neither a universal problem nor a self-executing hedge. Its resilience depends on the size and composition of buffers, the speed of recapitalisation, the assets available outside the LDI vehicle and the people and systems that make decisions and settle transactions.

TPR distinguishes two cumulative elements of an LDI buffer: an operational buffer for day-to-day market volatility and a market-stress buffer for severe stress. Its detailed guidance sets a minimum market-stress buffer of 250 basis points, subject to the stated assumptions and the particular arrangement. The guidance says that minimum assumes a scheme can provide additional cash or assets to replenish the buffer within five days; if it would take longer, a larger buffer may be appropriate. It also notes that buffer design must be operable with the scheme’s governance arrangements. 5

The 250-basis-point reference should therefore not be copied into a policy as a substitute for analysis. It is not a complete measure of resilience. A scheme with a complex asset-sale chain, limited authority to transfer assets, or a concentration in assets that fall in value when collateral is required may need a different operational design. TPR expects trustees to understand call thresholds, record the process in a collateral management policy, and assess the time required for decisions, notices, dealing and settlement. 5

A credible collateral plan normally answers the following practical questions in advance:

  • What event starts the process, who receives the notice and who validates it?
  • What amounts could be required under severe but plausible rate and inflation moves, including successive calls?
  • Which assets are eligible to meet the call, who controls them, and how quickly can they be converted and settled?
  • Is there a pre-agreed sale list or waterfall, and does it create a concentration or forced-sale risk?
  • What other demands are drawing on the same pool, including benefit payroll, foreign-exchange hedges, capital calls and employer-support arrangements?
  • Who can instruct sales or transfers if trustees cannot meet immediately, and what authority, contractual terms and signatories are required?

TPR’s 2025 LDI market-oversight work found material sector improvements since 2022, including higher buffers, clearer recapitalisation processes and greater focus on liquidity. It estimated that the LDI market had fallen from about £1.5 trillion at the end of 2021 to about £0.7 trillion at 31 March 2025, and that its estimated duration had reduced from around 20 years to 13 years. TPR also identified further work on collateral diversification and resilience testing. These are aggregate observations; they should not be used to infer the resilience of an individual mandate or pooled fund. 1

Governance and operational risk are investment risks in a stress event

A collateral policy that cannot be activated at speed is not a resilience control. In stressed markets, the key failure may be a delayed information feed, a missing signatory, a manual instruction, a cut-off time, an unclear delegation, a service-provider capacity limit or a cyber incident. These are operational issues, but they can drive investment outcomes when they prevent timely collateral delivery or force asset sales.

TPR says trustees remain ultimately responsible for investment decisions even where advisers, LDI managers, fiduciary managers or investment managers support implementation. It expects clear responsibilities for liability calculations, hedge advice, collateral monitoring, asset sales and delegated decisions. Strategic decisions must remain with trustees; delegated authority should be defined, documented and monitored. TPR also asks trustees to seek assurance that providers have capacity to act promptly in stressed conditions. 5

This supports a practical division between strategy and execution. The trustee board should approve the risk appetite, funding and investment journey, hedge objectives, permitted liquidity sources, escalation thresholds and the scope of delegation. A properly authorised manager or subcommittee may then need authority to take specified time-critical actions within those limits. The documentation should state what is delegated, when it may be used, what reports follow and when authority expires or is reviewed.

The Financial Conduct Authority’s (FCA’s) LDI guidance is directed principally at FCA-authorised firms managing LDI mandates and funds, not at trustees. It is still useful evidence of the value-chain risks a trustee should understand. The FCA says buffers are necessary but only a partial response; stress testing and contingency planning should address combined market and operational scenarios, including supplier failure or cyber attack. It expects managers to be able to enable clients to provide collateral within five days or sooner, or to use higher liquidity measures where that is not possible, and to have tested crisis-response protocols. 6

Trustees can use that distinction constructively. They should not assume the FCA guidance itself discharges trustee duties. Instead, they can ask managers and advisers for evidence of their operating assumptions, communication protocols, key third-party dependencies, cut-off times, contingency procedures and how these align with the scheme’s own collateral plan.

Test the whole system, then use the results to govern change

A portfolio-only stress test can understate the risk. The relevant test combines the economic scenario with the action timeline. For example, it might examine a sharp rise in nominal and real yields, concurrent falls in the marked value or liquidity of proposed sale assets, a benefit-payment date, and a delayed approval or supplier outage. The purpose is not to forecast a market event. It is to discover whether the scheme can make the required decision and deliver assets within the relevant window without impairing its ability to pay benefits or maintain its intended hedge.

TPR recommends resilience testing regularly and when there are significant changes in funding, investments or market conditions. Its guidance says testing should consider the effect on the LDI arrangement and buffer, replenishment assets, call size and transaction cost, decision and dealing cycles, other derivatives and the overall portfolio, including the ability to meet payment obligations. 5

The results should lead to a recorded management response. That might include changing the liquidity waterfall, broadening eligible collateral sources, modifying delegation, revising information requirements, changing operational buffers, reviewing hedge exposure, or seeking advice on whether the investment journey remains supportable by the covenant. It need not imply a predetermined sale of any asset or a standard hedge ratio.

System-wide context reinforces this discipline. The Bank of England’s July 2026 Financial Stability Report noted resilience improvements in LDI but said vulnerabilities in market-based finance, including leverage, opacity and interconnections, persist and may amplify stress under adverse conditions. It highlighted that a common tightening in funding conditions can produce correlated selling among sectors with common exposures. 7 A scheme’s first responsibility is to members and its own obligations, but avoiding assumptions that liquidity will be available at a benign price is also sound scheme governance.

What a board should be able to evidence

The output of this framework is not a generic “higher rates strategy.” It is an evidence trail that lets trustees explain why the scheme’s current risk, liquidity and delegation design fits its circumstances. At a minimum, it should show the funding bases used; material sensitivities; cash-flow forecasts; LDI buffer and collateral triggers; sources and timing of usable liquidity; tests of cumulative calls and operational delay; delegated authority and signatory arrangements; provider responsibilities; reporting; and conditions requiring review.

This approach retains an important distinction. Higher rates can improve the measured funding position, but they do not remove liability risk, liquidity risk, market risk, covenant risk or execution risk. A scheme is more resilient when its funding plan, asset strategy, collateral mechanics and governance model can operate together under adverse conditions—not merely when one funding metric is higher.

Evidence limitations

This article uses public UK regulatory and official-sector material available by the as-of date. It deliberately does not estimate the current funding, buy-out affordability, collateral need, hedge ratio, liquidity capacity or employer covenant of any individual scheme. PPF aggregate figures are rolled-forward estimates for the PPF-eligible universe and are not directly interchangeable with a scheme’s actuarial, accounting or insurer pricing basis. Regulatory guidance describes expectations and good practice but does not replace legal, actuarial, investment or covenant advice on a scheme’s facts. Market conditions, regulation and provider terms can change after publication.

Methodology and accountability

Aurex Intelligence Research Desk reviewed primary UK sources from TPR, the PPF, the FCA and the Bank of England. We used them to distinguish regulatory expectations, aggregate market context and institutional risk-management considerations. We did not use performance rankings, product promotions, paid placements or scheme-specific recommendations. Claims that depend on individual scheme data are qualified or excluded.

To report a factual error or request a correction, contact info@AurexIntel.com. Please include the article title, the passage in question, and a source where available.

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