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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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Themes
Figure 2: Change in swap rates over the next quarter
The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
The funding ratio index published by the Pension Protection Fund showed a slight decrease in funding levels quarter-on-quarter (124.7% at end March vs 125.7% at end December). Higher yields benefitted the liability side of the equation, however the dramatic fall in equities weighed upon funding ratios. High hedging levels mean that schemes saw only a modest gain from the higher yields but still retain some exposure to equities.
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Source: Columbia Threadneedle Investments. As at 31 March 2025
Inflation hedging rose by 12% quarter on quarter, whilst interest rate hedging activity increased by 27% from the previous quarter.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
Regions
As UK defined benefit schemes move from deficit management to surplus strategy, run-on is now a more credible alternative to buyout. We explore the changing funding, regulatory and governance backdrop.
After years in which buyout was the default destination for many UK defined benefit (DB) pensions schemes, the endgame debate is changing. Stronger funding levels have created sizeable surpluses across the market, while new surplus release regulations expected from 2027 could give well-funded schemes a more practical route to access and share that value. With the funding threshold confirmed at full funding on a low dependency basis – a level approximately 80% of UK DB schemes already exceed – trustees and sponsors face a more immediate strategic question: is the investment portfolio configured for a buyout or is it structured to support surplus release, and which approach is preferable?
Interested in learning more?
We explain why run-on is moving up the DB agenda, outline the main structures available to schemes, and summarise the emerging legal and regulatory framework for surplus release.
