Gilts and Gilt Yields in UK Pension Investment: Key Insights 2025 

At Mercer's Pension Investment Conference 2025, gilts were under the spotlight. For generations, they have been the instrument of choice for DB pension scheme’s liability-driven investing (LDI) strategies, helping match assets with liabilities. However, the market has changed rapidly in recent years. 

UK Government borrowing levels has reached record highs. From April to August 2025, the UK Government borrowed £84 billion, £16 billion higher than the same period in 2024.  Allied to the Bank of England’s (BoE) pivot from quantitative easing (QE) to quantitative tightening (QT) the total supply of gilts to the market is the highest in decades.

Reflecting this increased supply and waning demand from the UK DB Pensions market, UK Government borrowing costs have increased materially, with 30-year gilt yields approximately 6% per annum at the start of September 2025. This reflects the highest yield (for longer-dated gilts) since the late 1990s and presents a challenge for the Government which immediately impacts any new borrowing or the re-financing of existing borrowing as gilts mature. Beyond a mismatch in supply versus demand, highlighted below are several factors driving increased borrowing costs:

Speaking at the Pensions Investment Conference, Dan Cunnington, Head of LDI Solutions at Mercer, said gilt yields are “shaped by the push and pull forces of government supply and investor demand”.   

The buyer base is shifting as more traditional investors in gilts, namely the BOE (via QE) and DB pension schemes, are being replaced by yield hungry alternatives. Hedge funds accounted for approximately 60% of all UK gilt trading. Retail investors have placed record orders for gilts this calendar year. Insurance companies are increasingly holding gilts as part of their asset portfolios reflecting the attractive yields on offer. The price these new investors are willing pay for UK Government debt will be a key determinant of future gilt levels.

The nature of supply is adapting fast. Unsurprisingly, research from the Debt Management Office (DMO) has revealed a declining structural demand for long-dated gilts, driven by higher borrowing costs and lower investor demand, and they have reacted accordingly. The DMO highlighted an 'important shift' away from long-dated issuance due to higher borrowing costs and lower investor demand. Similarly, the Bank of England is adapting, shifting sales of gilts via QT to short-dated stocks and decreasing the pace of QT to £70bn from £100bn over the previous year.

Cunnington explained that the Office for Budget Responsibility (OBR) has raised caution ahead of the Autumn Budget. According to the OBR, the UK’s public finances have emerged from a series of major global economic shocks in a relatively vulnerable position and efforts to put the country on a more sustainable footing have been largely unsuccessful. High borrowing (and the associated gilt issuance which comes with it) looks likely to stay, with a combination of tax rises and spending cuts appearing necessary to balance the books. Given recent rises in yields, we expect the Government to be cautious on any ‘surprise’ changes in borrowing levels, with any potential change to be well signposted. 

With DB schemes fast maturing, Schemes are likely to hold their gilts to maturity using them to pay member benefits or sell them prior to maturity to fund potential risk transfer activity. Either way, DB pension gilt ownership will reduce materially over the next decade. For long-dated conventional gilts and most index-linked gilts (UK's DB schemes own approximately 45% of the index-linked gilt market) that creates a big challenge. ”Who is going to buy long-dated gilts, and what price will they be willing to pay?” asked Cunnington. 

With changes in the dynamics of the marginal gilt buyer, the trading activity dictating gilt pricing has changed. This creates a new challenge for pension scheme Trustees and investment leaders.

This market evolution has created more uncertainty. One possible remedy is cash flow matching, which matches benefit payments to high-quality investments distributing predictable income. This minimises the extent to which leverage is required within the investment strategy and prevents DB schemes from having to sell assets during unfavourable market conditions.   

Mercer’s Cashflow Driven Investment (CDI) strategies can help mature DB schemes optimise their investment strategies in the final stages of their journey, integrating LDI with growth fixed income and corporate bonds to ensure they meet their objectives.  

With gilts making up an increasingly large portion of Schemes’ asset allocation, Schemes should remain agile and informed to protect and grow their assets during periods of high volatility.

Equipped with a team with investment expertise, Mercer is as a trusted partner to help scheme managers navigate these complexities, mitigate economic risks and respond to policy changes.