A sharp decline in demand from pension funds for long-term UK government bonds could drive up the country’s borrowing costs by at least £20 billion over the coming decades, according to the Office for Budget Responsibility (OBR).
The government’s independent fiscal watchdog warned that the shrinking appetite for gilts among defined benefit (DB) pension schemes—once a reliable cornerstone of long-term bond ownership—will have major implications for public finances.
David Miles, a member of the OBR’s budget responsibility committee, described the outlook as “worrisome”, telling MPs that the UK is entering a new era in which one of the most dependable buyers of government debt is disappearing.
“You’ve got to find people and induce them to hold bonds,” said Miles. “That means you’ve got to offer them a better deal.”
The OBR estimates that this shift could add 0.8 percentage points to long-term gilt yields, increasing debt servicing costs by £22 billion. That figure may be conservative, given that public debt—currently at 100% of GDP—is expected to rise significantly in the decades ahead.
Tom Josephs, another OBR committee member, echoed the warning: “If debt is rising and you need to attract even more buyers, then likely there will be a bigger fiscal effect.”
Defined benefit schemes have traditionally held gilts to hedge long-term liabilities, but most are now closed to new entrants. The pensions market has moved toward defined contribution (DC) schemes, which tend to hold fewer government bonds. As a result, the OBR expects demand for gilts from DB schemes to fall from around £1 trillion—30% of GDP—to just 11% by 2050, with the bulk of that shift occurring before the end of this decade.
The change is forcing the UK Debt Management Office to pivot towards issuing more short-term debt, which tends to be more costly and volatile. It also increases reliance on more “price-elastic” buyers such as foreign investors and hedge funds, who typically demand higher yields than domestic pension funds.
Richard Hughes, chairman of the OBR, explained: “Defined benefit pension funds used to be a source of safe demand, and we think that demand is going to wane—and already has. This means the government has to lure in more price-elastic buyers. That has implications for the cost of debt.”
The shift in bondholder composition could also heighten volatility. Patient, long-term investors are being replaced by speculative actors, leading to greater sensitivity to market movements. The International Monetary Fund has similarly raised concerns about the fiscal risks tied to this structural change in gilt ownership.
The Bank of England is also under pressure to moderate the pace of its quantitative tightening and bond sales, which some economists argue are exacerbating instability in the gilts market.
With the OBR projecting that UK public debt could rise to around 270% of GDP over the next 50 years, securing reliable sources of bond demand is becoming more critical—and more expensive.
Unless new long-term investors can be found, the government may face higher borrowing costs just as fiscal pressures from ageing demographics, healthcare, and defence continue to rise.
