CPI holds at 3.0% but Iran shock has already changed the picture for DB pension schemes, with liabilities down £50bn

CPI holds at 3.0% but Iran shock has already changed the picture for DB pension schemes, with liabilities down £50bn

25 Mar 2026

Adam Gillespie, Partner at XPS Group, comments: “Today's CPI figure will grab the headlines, but for DB pension schemes far more significant market impacts have already happened. Since the Iran conflict began on 28 February, it is the UK bond market's reaction, not today's inflation number, that has driven the bigger shift in funding positions.

Renewed inflation risk is clearly bad news for individuals and government finances. But for most DB schemes the picture is more nuanced. XPS estimates that liabilities on a long-term funding basis have fallen by approximately 5% since 28 February, equivalent to around £50bn. Long-dated gilt yields, the primary driver of liability valuations, have risen sharply, with the 10-year gilt reaching almost 5% on 20 March, its highest level since 2008. Rising yields reduce the present value of liabilities more quickly than higher inflation expectations increase them, meaning that for most schemes, the net effect is a material reduction in liabilities.

How this translates into surplus depends on a scheme's exposure to risky assets, but many will have seen their position improve further. This sharpens an already live debate: as the Pension Schemes Bill progresses with surplus release regulations expected later this year, many trustees are considering how surplus can benefit members. For those trustees, one of the areas they often look at is how members benefits have been affected by increases in the cost of living.

These market moves have also created additional challenges for liability hedging strategies, compounding existing gilt market fragmentation. Two issues stand out: higher inflation can leave schemes inadvertently overhedged; and curve shape changes can have a significant second-order impact on hedge effectiveness. XPS's research shows that even for a modest £100m scheme, the difference between a highly robust and a less robust hedge can result in losses of around £600,000 per year - and significantly more in conditions like these. Trustees and sponsors should be reviewing whether their liability hedges remain at the right level and protected against further sharp moves in yields and inflation.”

Mark Searle, Head of DC Investment at XPS Group, comments: “The prospect of higher future inflation is a blow for UK DC pension savers. Younger members have enjoyed strong global equity returns over the last three years, but a period of persistently higher inflation would make retirement targets harder to achieve without changes to contributions or investment strategy. For older savers already drawing an income, higher inflation means larger withdrawals are needed just to maintain purchasing power. Combined with the elevated market volatility we’re seeing, this significantly increases the risk of running down drawdown pots too quickly and brings into focus the risk DC retirees face with pound cost ravaging.”