The Bank of England has issued a stark warning about a potential pension fund crisis triggered by the rising cost of government borrowing. According to the central bank, pension funds that rely heavily on UK government bonds (gilts) could face significant risks if bond yields continue to rise.
What Happens When Borrowing Costs Rise?
As borrowing costs increase, so do bond yields. Due to the inverse relationship between yield and price, existing gilt prices decline, eroding the market value of pension fund portfolios.
Many pension funds employ Liability-Driven Investment (LDI) strategies that involve leverage. Falling gilt prices may trigger margin calls, forcing distressed asset sales or requiring emergency liquidity—mirroring the 2022 gilt crisis.
Systemic Risks
The devaluation of assets could leave pension funds unable to meet future benefit obligations, creating major funding gaps. If mass gilt liquidations occur, the bond market may face significant volatility, shaking investor confidence and prompting a broader market downturn.
A critical downstream effect is pressure on the British Pound (GBP). Market instability could weaken the currency, increase import costs, and fuel inflation.
If these risks intensify, an emergency intervention by the Bank of England—like during the 2022 mini-budget turmoil—could be necessary.
💬 Comment from Mr. Ade Yunus:
“Overall, the Pound is still showing a positive growth trend. However, if new U.S. tariffs are enacted, markets are likely to become more cautious and defensive.”
Source: https://www.youtube.com/watch?v=dYt6Glsyxqc