Bank of England cuts interest rate by 0.25%

Bank of England cuts interest rate by 0.25%

18 Dec 2025

Adam Gillespie, Partner, XPS Group, commented: "The Bank of England's cut to 3.75% marks the first time base rates have fallen below 4% since February 2023. Whilst mortgage holders will welcome the relief, the impact on defined benefit schemes is more nuanced than headlines suggest, as funding is driven by long-term government bond yields rather than short-term rates.

The level of rates is important for DB schemes, but with most now close to maximum hedging levels, the performance of interest rate hedges and the behaviour of the gilt curve matters just as much.

We are currently seeing significant fragmentation in the UK gilt market, with conditions amplifying mismatches between scheme liabilities and protection strategies. This creates material financial risk, especially for maturing schemes with perceived low risk strategies.

Trustees and sponsors need to stress-test their hedging framework, with robust LDI governance now the defining factor in the success of future DB investment strategies."