This seems to be bug with RetryFilterFunctions. If you see their code

SimpleRetryPolicy simpleRetryPolicy = new SimpleRetryPolicy(config.getRetries(), retryableExceptions);
        compositeRetryPolicy.setPolicies((RetryPolicy[])Arrays.asList(simpleRetryPolicy, new HttpRetryPolicy(config)).toArray(new RetryPolicy[0]));
        RetryTemplate retryTemplate = retryTemplateBuilder.customPolicy(compositeRetryPolicy).build();

They build compositeRetry policy with HttpRetryPolicy as second policy which is internal class and extends NeverRetryPolicy and on CompositePolicy they do not set optimistic = true hence even though first policy’s canRetry returns true, overall canRetry for composite policy is returned as false hence retry for exceptions does not work. You can create your own custom retry filter using Spring RetryTemplate

@AllArgsConstructor
private class RetryWIthDelay implements HandlerFilterFunction<ServerResponse, ServerResponse>
    {
        private int count = 0;
        private long delayBeforeRetry = 10L;
        private Set<Class> exceptionList;

        private Set<HttpStatusCode> retryStatusCodes;
        @Override
        public ServerResponse filter(ServerRequest request, HandlerFunction<ServerResponse> next) throws Exception
        {
            RetryTemplateBuilder templateBuilder = RetryTemplate.builder();
            Map<Class<? extends Throwable>, Boolean> exceptionsToRetry = new HashMap();
            exceptionList.stream().forEach(eachExceptionClass -> exceptionsToRetry.put(eachExceptionClass, true));
            SimpleRetryPolicy simpleRetryPolicy = new SimpleRetryPolicy(count, exceptionsToRetry);
            RetryTemplate retryTemplate = templateBuilder.customPolicy(simpleRetryPolicy)
                    .fixedBackoff(Duration.ofSeconds(delayBeforeRetry))

                    .build();
            return retryTemplate.execute((context) -> {
               ServerResponse downStreamReponse = next.handle(request);
               return downStreamReponse;

            });
        }
    }

This above filter can be configured as below, I did not try configuring same in application.yml but have create Bean with this

return GatewayRouterFunctions.route("retry_test1")
                .filter(new RetryWIthDelay(
                        5,
                        10,
                        Set.of(ConnectException.class),
                        Set.of(HttpStatus.BAD_GATEWAY)))
                        .build();