There has been a lot of commentary recently about UK defined benefit pension schemes delivering low returns over the past five years, with some suggesting that members would have been better off in cash or savings accounts.

In my view, that conclusion risks misunderstanding both what has happened and why.

Yes, some DB schemes have reported very low returns in recent years, often towards the bottom end of a 0–4% p.a. range over the last five years, and in a few cases even lower. Set against strong equity market performance over the same period, that looks uncomfortable.

But judging those outcomes without context leads to the wrong conclusions.

The Sunday Times headline captures the mood perfectly, but it also risks missing the most important point, that in DB pensions you can only judge outcomes by looking at assets and liabilities together.

This article could have been written ten years ago, but saying the opposite

One of the reasons I am uneasy with the current debate is that, with a change in timing, we could have seen a very similar article written ten years ago, making the opposite point.

Ten years ago, the dominant story was not surpluses, it was widening deficits. Over the previous five years, funding levels across much of the UK DB system had deteriorated materially, largely because long-dated bond yields fell sharply, which increased the present value of liabilities. In that environment, many schemes were criticised for taking too much risk while still ending up deeper in deficit.

At that point, the debate would have focused less on ‘missed upside’ and more on volatility and deficits, because schemes with higher equity exposure could look very strong in good years, and very weak in bad ones.

Back then, the criticism was not that schemes were too cautious, but that they were taking too much risk and still ending up in deficit.

What has changed is not behaviour, but markets.

This debate is really about timing

Over the past few years, DB funding positions have improved dramatically. That improvement has been driven by a very favourable combination of:

• sharply higher long-dated bond yields, which have reduced the present value of liabilities, and

• strong equity markets.

When yields rise, liabilities fall because the discount rate used to value future pension payments is higher. A DB liability is the value today of cashflows that will be paid out over decades. You estimate that “today value” by discounting those future payments back to the present using a long-dated rate (often linked to gilt yields, plus or minus adjustments). A higher discount rate means those same future cashflows are worth less today, so the reported liability reduces.

In many schemes, liabilities can fall by more than assets when yields rise, for two related reasons.

First, DB liabilities typically have a long duration, often longer than the effective duration of the asset portfolio, particularly if the scheme still holds a meaningful allocation to credit and growth assets. A given move in long-dated yields therefore has a bigger valuation impact on the liability than on the assets.

Second, even where schemes have hedged some of their interest rate exposure, the hedge is rarely complete. Many schemes are not fully hedged, and the protection is implemented using different instruments and liquidity buffers. So when yields rise, asset values can fall, but liabilities can still fall further, improving funding.

Had markets evolved differently, this conversation would not be happening. The same strategies that are now criticised would instead be praised for prudence.

It is very easy to look at outcomes today and assume they were obvious in advance. They were not.

This cartoon captures the point neatly, the rear-view mirror shows the last five years, when equity markets and bond yields both rose, but through the windscreen the next five years could just as easily be good or bad, depending on how markets turn.

Assets Fell, Surpluses Rose, You Have to Look at Both Sides

One thing that gets lost in some of the commentary is that, in aggregate, assets have fallen across the DB system (as measured by the PPF 7800) over the period being discussed, from around £1.8 trillion in Dec 2020 to around £1.1 trillion in the latest data (November 2025), a drop of roughly £0.7 trillion or 39%. I am not saying the level of assets is the same thing as investment returns, it is not, because asset values move with cash flows, contributions in, benefit and transfer payments out, and running costs. But it is still a useful guide to what has been happening at a system level.

For UK private sector DB schemes, a reasonable illustrative ballpark for average investment returns over the last five years might be in the low single digits, say around 0–4% p.a., with many heavily hedged, bond‑heavy schemes likely clustering towards the lower end of that range, and some even slightly negative. That is not a sign of failure, it is largely what you would expect from portfolios designed to reduce volatility and protect the funding position, particularly in a period when yields rose sharply, which mechanically depresses the market value of bond-heavy assets.

That is why I think it is unfair to single out a handful of schemes for “poor returns”, as if they are uniquely at fault. The broader backdrop is that many common DB portfolios have been under pressure in market value terms as yields have risen. That is a system wide effect, not a scheme specific failure.

At the same time, and this is the key point, surpluses have increased sharply. That is because liabilities have fallen by even more than assets as long-dated discount rates moved higher. So if you look only at the asset line, you can end up with the exact wrong impression.

The only sensible way to assess how DB schemes have actually progressed is to look at assets and liabilities together, and to be clear about the objective, whether the scheme is running on or moving towards buy-in or buyout.

Why lower returns were a feature, not a failure

In my view, many of the schemes now reporting lower returns are doing so precisely because they took the opportunity to de-risk once funding allowed.

After nearly two decades of persistent deficits, trustees were finally able to lock in gains, reduce volatility, and secure members’ benefits. Choosing certainty over upside in that context is entirely rational.

De-risking explicitly means giving up future upside. Lower expected returns are not an accident, they are the intended consequence.

By contrast, schemes that remained more exposed to growth assets have often reported stronger returns. But that is because they continued to take risk, not because de-risking was a mistake.

The counterfactual that is being ignored

Schemes that stayed mismatched were exposed to two major risks:

• long-dated bond yield risk, and

• equity market risk.

Both happened to move in their favour.

To highlight equity market performance, I have shown the FTSE 100 because, at the start of the period, UK private sector DB schemes typically still had meaningful exposure to UK equities, although that allocation is much lower for many schemes today after years of de risking.

I have used the FTSE 100 price index rather than total return because the price level is the version most readers will recognise and is the one most commonly quoted in the media. For pension funds, however, total return is what matters economically, because it includes dividends received and reinvested, which can be a material part of long run equity returns.

The last few years, and especially the most recent period, have seen equity markets repeatedly break new highs, which can make it easy to get complacent about how quickly sharp drawdowns can arrive.

I remember the dot-com crash of 2000–3, and the Global Financial Crisis of 2008–9, when the FTSE roughly halved on both occasions. We have not had a sharp, sustained downturn since the pandemic, so memories can be short.

That outcome of the past 5 years was not guaranteed. Had equity markets fallen, or yields remained low, the same strategies would have been criticised for recklessness.

Risk only looks obvious after it has paid off.

How DB asset allocation actually works in practice

It is also worth being clear about how investment decisions are made in practice.

In most DB schemes, strategic asset allocation is set by the trustees, heavily informed by their employee benefit consultants. That strategic framework determines how much risk sits on the balance sheet.

Once that framework is agreed, investment managers operate within relatively tight constraints. They do not decide whether a scheme is risk-on or risk-off. They implement the strategy they are given.

So when we talk about schemes being de-risked, we are really talking about deliberate, trustee-led decisions about risk appetite, not fund managers “playing it safe”.

Run-on versus insured, the real dividing line

In my view, much of this debate is not really about returns at all. It is about endgame philosophy.

Some schemes want to run-on, retaining assets and accepting investment risk in pursuit of higher long-term returns. Others see buy-in or buyout as the natural destination once funding allows.

The Aberdeen–Stagecoach transaction (which I wrote about here) is a good example of a genuine run-on approach, where surplus funding is being used constructively while keeping risk on the balance sheet. That is a valid model for some schemes.

Equally, buyout is a valid and rational choice for many others.

Fees, incentives, and attitudes to insurers

It would be naïve to ignore the incentives at play.

Run-on strategies tend to involve ongoing advisory, fiduciary, and asset management fees. Buyout, by contrast, is a one-off event, after which many advisory fee streams end.

There is also, in my experience, a residual discomfort in parts of the pensions world about “handing money to insurance companies”. That sentiment surfaces repeatedly in commentary, even if it is rarely stated explicitly.

Neither of these points invalidates the run-on case, but they do help explain why views can be strongly held.

Why insurance is a rational destination

Buyout is often criticised on the basis that it “leaves money on the table”. That criticism misunderstands what insurance is designed to do.

Insurance is not about maximising returns, it is about removing risk. Members receive a very high degree of certainty, sponsors remove covenant exposure, and trustees achieve finality.

If you want additional upside, you must accept additional risk. There is no way around that trade-off.

Are we structurally playing it too safe?

This is where I do think there is a legitimate wider question.

In the insurance world, Solvency II, and now Solvency UK, is built around a one-in-200 stress event. That is an extremely conservative standard.

By contrast, proposed UK DB superfund models have been discussed with capital standards closer to one-in-100, reflecting a different balance between security and capital efficiency. Neither number is “right” in an absolute sense. They are policy choices.

The same trade-off exists in pensions. Higher certainty means lower expected returns. Higher returns require accepting risk, including the possibility of worse outcomes.

The real lesson

In my view, it is unfair to label low DB returns as a scandal. In many cases they reflect trustees doing exactly what they were asked to do, locking in funding gains after years of deficits and uncertainty.

It is entirely reasonable to ask whether, at a system level, we have become too cautious. But that debate needs to be framed honestly, acknowledging the trade-offs involved, rather than rewriting history based on recent market outcomes.

Risk only looks cheap once it has already paid off.

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Disclaimer
The content of this publication reflects my personal views only and is provided for information purposes. It does not constitute investment advice or investment research, and I am not acting in the capacity of an investment adviser. I own shares in some of the companies mentioned. Readers should carry out their own analysis or seek professional advice before making any financial decisions.

The UK government wants more investment in the UK economy. Rachel Reeves, the UK’s Chancellor of the Exchequer, has been clear that Britain suffers from long-term underinvestment, and that domestic savings should play a bigger role in supporting UK companies and growth.

Recent policy signals reflect that thinking. One example is the decision to reduce the cash ISA allowance to £12,000, explicitly designed to encourage households to move away from cash and towards investment. At the institutional level, the government has also focused on how pension funds and insurers deploy capital, and whether more of that capital can be directed towards productive UK assets.

Against that backdrop, charts showing UK pension funds with very low exposure to UK equities have attracted a lot of attention. Compared with countries such as the US, Japan or Australia, the UK appears to invest very little of its pension savings at home. The obvious conclusion is that UK pension funds are choosing not to back UK companies.

That conclusion is understandable. It is also wrong.

The headline numbers combine two very different types of pension scheme. Defined contribution pensions, which most people now save into, do invest heavily in equities. Defined benefit pensions, which are largely closed and much more mature, do not. The UK still has a very large stock of defined benefit assets, and that single fact explains much of the apparent puzzle.

Once you understand how those schemes work, and what they are designed to do, the UK’s low allocation to UK equities stops looking like a lack of confidence and starts looking like a structural consequence of how the pension system has evolved.

The rest of this note explains why.

The chart that triggered the debate

The chart below has been widely shared as evidence that UK pension funds are failing to invest in the UK. It compares the domestic equity exposure of pension funds with each country’s weight in the global equity market. On that basis, the UK appears to be a clear outlier. UK pension funds hold around 3% in UK equities. Other countries appear to invest far more heavily at home.

It is an arresting comparison, and it is easy to see why it has gained traction. Read at face value, it suggests that UK pension funds are choosing to allocate capital away from UK companies, even relative to the size of the UK market itself.

That interpretation, however, rests on a misunderstanding of what is actually being measured.

What this chart is really showing

This chart shows domestic equity exposure, not total equity exposure. In other words, it answers the question: of the assets pension funds hold, how much is invested in equities listed in their home market?

For countries where pension assets are dominated by defined contribution schemes, this measure largely reflects the equity choices being made by savers in accumulation. For countries like the UK, where pension assets are still heavily dominated by mature defined benefit schemes, it reflects something very different: how trustees manage risk against long dated pension liabilities.

In the UK, those liabilities are largely fixed and inflation linked, and the schemes that sit behind them are mostly closed and mature. As a result, asset allocation has progressively shifted away from equities and towards assets that better hedge those liabilities. The low domestic equity number is therefore not a judgement on UK equities. It is a by-product of liability driven investment in a DB dominated system.

Once that context is added, the UK no longer looks anomalous. It looks structurally different.

The starting point is DB versus DC

Any discussion about UK pension fund investment needs to start with a basic structural point. The UK pension system still looks very different from many of its international peers.

While most new pension saving in the UK now happens through defined contribution schemes, the UK continues to have a very large stock of legacy defined benefit assets. Those DB schemes are mostly closed, increasingly mature, and dominated by deferred members and pensioners rather than active employees.

That distinction matters because DB and DC schemes are designed to do very different things. DC schemes are accumulation vehicles. They exist to build wealth over long horizons, and equities play a central role in that process. DB schemes are promise based. Their purpose is to meet a defined set of long dated liabilities, and asset allocation is driven by risk management rather than return maximisation.

Before looking at equity allocations, it is therefore essential to understand how much of each country’s pension system sits in DB versus DC.

DB still dominates the UK in absolute terms

The chart below shows the split between defined benefit and defined contribution pension assets by country in 2024.

Despite decades of DB closures, around three quarters (73% to be exact) of UK pension assets are still held in defined benefit schemes. That immediately distinguishes the UK from countries such as Australia and the US, where pension systems are overwhelmingly DC led.

Importantly, closed DB schemes do not shrink quickly. Even when closed to new entrants, liabilities continue to grow through future accrual for remaining actives, revaluation of deferred pensions, and indexation of pensions in payment. Assets grow alongside those liabilities, supported by contributions, investment returns and sponsor funding.

The result is that DB schemes continue to set the tone for aggregate UK pension fund behaviour, even as DC grows steadily in the background. That balance is the key structural driver of everything that follows.

Scale matters as much as direction

It is true that the direction of travel is clear. New contributions overwhelmingly flow into DC, while DB schemes are gradually running off. However, direction and scale are not the same thing.

DB assets are declining as a share of the total, but from a very large starting point. DC assets are growing, but from a much smaller base. Until that balance shifts much more materially, DB behaviour will continue to dominate the aggregate asset allocation numbers.

This is why UK pension fund allocations can look conservative even as the system transitions towards DC. The growth of DC matters, but the existing stock of DB assets still matters more.

How UK pension fund asset allocation has changed

The chart shows how the aggregate asset allocation of UK pension funds has evolved over the past decade. Equity exposure has fallen materially, while bond allocations have risen and remained dominant. Cash and other assets have fluctuated at the margin, but the defining shift has been away from equities and towards fixed income.

This change reflects the increasing maturity of UK DB schemes. As schemes age, the balance of risk changes. The primary objective becomes maintaining funding stability and matching long-dated, inflation-linked liabilities, rather than maximising long-term returns. Bonds play a central role in that process, equities do not.

The key point is that direction and scale are not the same thing. DC is growing, but from a smaller base. DB is declining as a share of total assets, but from a very large starting point. Until that balance changes much more materially, DB behaviour will continue to dominate the aggregate numbers, including equity exposure.

This helps explain why UK pension fund allocations continue to look conservative, even as the system slowly transitions towards DC.

Why mature DB schemes hold fewer equities

UK defined benefit schemes did not move away from equities because they lost faith in growth assets. They moved because the nature of their liabilities changed.

Thirty years ago, most DB schemes were open. They had large populations of active members and a high proportion of salary related liabilities. In that environment, it was at least arguable that equities provided a loose hedge. Wages were treated as a real liability, equities as a real asset, and the volatility of equities was assumed to wash out over long horizons.

That view was widely accepted at the time.

When I trained as an actuary in the mid 1990s, studying for the exams between 1994 and 1997, this approach was explicitly taught. Although equity returns were volatile year to year, the prevailing assumption was that, over time, that volatility would mean revert.

Both pension schemes and actuarial thinking have moved on.

As DB schemes closed, their membership profiles changed. The balance shifted away from active members and towards deferred members and pensioners. Cashflows became more predictable. Inflation linkage became explicit. Duration became measurable. In that environment, liabilities started to look much more like bonds.

At that point, equities stopped behaving like a hedge and started behaving like unrewarded volatility.

Modern actuarial thinking reflects that shift. Even for salary related liabilities, equities are no longer regarded as a matching asset. From an option theoretic perspective, equity risk does not disappear with time, it compounds. The range of possible outcomes widens rather than converges. By contrast, fixed income assets, inflation linked bonds and swaps provide a far more reliable hedge against the risks that matter to mature DB schemes.

The move away from equities in UK DB schemes has therefore been both structural and intellectual, not ideological.

What this looks like in the data

The consequences of these structural changes are visible very clearly in the data.

The chart below shows domestic equity exposure as a share of total equity exposure, across major pension markets since the late 1990s. The pattern is strikingly consistent. In almost every country, the proportion of equities invested domestically has fallen steadily over time.

For the UK, this reflects two overlapping forces. As defined benefit schemes have matured, equity exposure overall has been reduced in favour of bonds and liability hedging assets. At the same time, within the remaining equity allocation, portfolios have become increasingly global, reflecting the adoption of global benchmarks, passive strategies and a deliberate move away from concentrated national equity risk.

Once equity portfolios are constructed on a global basis, domestic shares naturally represent a smaller fraction of total equity exposure. That shift does not require an active decision to move capital overseas. It follows mechanically from global diversification.

The key point is that this chart captures a decline in equity home bias, not a judgement on UK companies. Domestic equity exposure is a second order outcome of broader asset allocation and benchmark choices. The first order decisions are how much equity risk to run at all, and how that equity exposure is diversified. Once those decisions are made, the domestic equity share follows.

How asset allocation decisions are actually made

It is also worth being clear about how these decisions work in practice, because the process is often misunderstood.

In defined benefit schemes, asset allocation is set by the trustee board, not by asset managers. Trustees are advised by investment consultants, often referred to as employee benefit consultants, who help them assess liabilities, funding risk, covenant strength and regulatory constraints.

The resulting strategy is formalised in the Statement of Investment Principles. That document sets out target asset allocations and permitted ranges for each asset class. Asset managers are then appointed to run money strictly within those limits.

Asset managers do not have discretion to materially increase equity exposure, and they certainly do not decide to overweight UK equities on their own initiative. Even if a manager believed equities looked attractive, or that UK equities were undervalued, they would be unable to act on that view outside the agreed mandate.

Nor could a trustee board simply decide to move a DB scheme to 100% equities, even if it wanted to. Fiduciary duty, funding level volatility, sponsor covenant risk, regulation and oversight from the Pensions Regulator all place clear constraints on that behaviour.

This is therefore not a story about asset managers choosing to “ship capital overseas”. It is a story about trustees managing long dated liabilities prudently within a mature DB system, using a governance framework that prioritises funding stability over return maximisation.

Why bond allocations did not fall when yields were close to zero

A common challenge to this explanation is why bond allocations did not fall as yields approached zero. The short answer is that yield had stopped being the binding constraint.

For mature DB schemes, the dominant objective shifted away from maximising returns and towards maintaining funding level stability. As interest rates fell, the present value of liabilities rose. Managing that sensitivity became more important than the level of income available on new bond purchases.

In that environment, the value of interest rate and inflation hedging increased, not decreased. Bonds and swaps reduced balance sheet volatility even at very low yields. Equities, by contrast, offered no hedge against falling discount rates and increased short term funding risk.

Low yielding bonds were therefore not held because they were attractive investments in their own right. They were held because they were effective liability management tools. Once that objective is recognised, the persistence of high bond allocations through the low yield period becomes entirely rational.

This is not just a pensions story, insurers have already been here

This dynamic is not unique to pension funds. It is something we have already seen very clearly in the UK life insurance sector.

I have written previously about the steady reduction in equity exposure by UK life insurers over time. See link here for Substack post on insurers moving out of equities.

That shift is sometimes framed as a loss of confidence in growth assets. In reality, it has been driven by the same structural forces now shaping mature DB pension schemes, reinforced by regulation.

Historically, UK life insurers held very high equity exposures against largely fixed liabilities, with minimal formal asset liability matching in place prior to the early 2000s.

As an example, at the end of 1999, Prudential’s with profits fund held around 72% in equities, including 58% in UK equities. That portfolio reflected a very different liability structure, a very different regulatory regime, and a very different risk framework.

Source: Prudential.

That model proved fragile. The equity bear market of 2000–03 exposed the mismatch between volatile assets and contractual liabilities, with severe balance sheet consequences across the sector.

In response, regulation and risk management frameworks changed fundamentally. The introduction of stochastic modelling, capital based regulation and explicit asset liability management shifted insurer behaviour decisively. As insurers wrote more annuities and pension risk transfer business, their liabilities became increasingly long dated, contractual and bond like. From an asset liability perspective, equities became a poor match.

Under Solvency II, equities attract a 39% capital charge. Insurers are permitted to hold equities, but doing so consumes large amounts of capital while providing no meaningful liability hedge. In practice, the economics make equity exposure unattractive even before any investment judgement is applied.

As a result, fixed income, credit and cashflow matching assets are not simply preferred by insurers, they are required. The long term decline in equity exposure reflects matching discipline and regulatory evolution, not a discretionary move away from growth assets.

The parallel with pensions is clear. In both insurance and DB pensions, equity exposure falls as liabilities become more explicit, more bond like and more tightly managed. In both cases, the outcome is driven by liability structure and risk management, not sentiment.

A live example, the Aberdeen–Stagecoach transaction

A recent real world example helps make this concrete.

The Aberdeen–Stagecoach pension transaction is explicitly a run on solution, not a buy out. That choice matters. By opting to run on, the scheme has chosen to retain investment risk and, as a result, it will continue to hold equities as part of its long term strategy.

Had Stagecoach instead proceeded to a full insurance buy out, the outcome would have been very different. The equity allocation would have fallen effectively to zero. The assets would have been transferred into an insurance balance sheet and invested primarily in fixed income and cashflow matching assets to support contractual annuity liabilities.

The contrast is instructive. Equity exposure is not disappearing because schemes dislike equities. It disappears when liabilities are crystallised into guaranteed promises. As long as schemes remain open to investment risk, or choose to run on, equities can still play a role.

I have written in detail about how the Aberdeen–Stagecoach structure works, and where it sits within the DB endgame spectrum, see Substack here.

What this means for policy

If the policy objective is to increase domestic equity investment, the lever is not to criticise DB schemes for behaving rationally. Those schemes are doing exactly what they are designed to do. The effective levers sit elsewhere.

The most important lever is defined contribution pensions. Accumulation systems drive long-term equity investment in countries such as Australia and the US, not mature DB schemes. Growing DC at scale, designing default funds carefully, and ensuring contributions are sufficient over time matter far more than exhortations about asset allocation.

That, in turn, means government policy needs to be supportive of pension saving. The intention signalled in the recent Budget to remove salary sacrifice on pension contributions would move in the opposite direction, weakening incentives to save through pensions and reducing the pool of long-term capital available for investment.

Contribution rates matter as well. In Australia, employers are required to contribute 12% of an employee’s earnings into superannuation. By contrast, the UK’s auto-enrolment system delivers 8% of qualifying earnings in total, of which 3% is paid directly by employers, 4% by employees, and 1% via tax relief. That 8% also applies only to a narrow band of earnings, rather than total pay.

The UK’s low domestic equity exposure is therefore not a failure of ambition. It is the legacy of a pension system that matured early and now invests accordingly. If policymakers want a different outcome, the focus needs to be on the structure of the system going forward, not on second-guessing schemes that are managing long-dated liabilities through disciplined asset–liability matching.

Understanding that distinction matters, because the choice is between policy that works and policy that merely makes a point.

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Disclaimer
The content of this publication reflects my personal views only and is provided for information purposes. It does not constitute investment advice or investment research, and I am not acting in the capacity of an investment adviser. I own shares in some of the companies mentioned. Readers should carry out their own analysis or seek professional advice before making any financial decisions.

On 4 December 2025, Aberdeen announced something that immediately drew attention across the pensions and insurance industry. Aberdeen will become the new sponsoring employer of the Stagecoach Group Pension Scheme. It is an unusual piece of news not because of the size of the scheme, although it is meaningfully sized at about £1.2bn, but because it moves in the opposite direction to almost everything we have seen for the past twenty years. For decades, corporates have been trying to remove defined benefit schemes from their balance sheets. This transaction represents the reverse, where a corporate has stepped in to take one on.

I have spoken to Jason Windsor, the Chief Executive of Aberdeen, and Rob Andrew, Head of UK Pension Strategy & Solutions, who is leading the project within Aberdeen. Those discussions have informed my understanding of both the rationale and the mechanics of the deal.

The structure has generated a significant amount of debate. Several commentators have suggested that it challenges the bulk annuity market. Others have drawn comparisons with Superfunds. There are views that it is simply a sensible run-on arrangement. My view is more straightforward. The deal is interesting, it is unusual, and it is entirely rational for both Stagecoach and Aberdeen. It does not represent a threat to the buyout market and it does not signal the beginning of a large trend.

Before getting into the detail, it is helpful to set out where this structure sits in the wider landscape.

The three options when schemes are well funded

When a DB scheme reaches a strong funding position, trustees broadly face three endgame routes. These options sit on a spectrum of security and cost.

1. Buyout with a regulated insurer

My view is that buyout is, for most schemes and in most circumstances, the safest option available to members. Insurers are required to hold substantial capital under Solvency UK. They are tested against one in two hundred year stresses, their investment strategies are tightly constrained, and the full legal liability transfers to them. Taken together, this makes buyout the highest security option for the majority of schemes.

It is important to acknowledge that this is not universally true in every scenario. Security depends on parameters: the strength of the scheme’s funding position, the robustness of the employer covenant, the riskiness of the investment strategy, and the quality of the insurer’s own capital position. There will always be specific examples where a very well funded run on, supported by a strong corporate sponsor and significant retained surplus, could provide security comparable to some other options. These cases exist, but they are exceptions rather than the norm.

2. Superfunds

Superfunds sit between buyout and run on. They hold a dedicated capital buffer and follow a regulated framework that provides more protection than a simple corporate run on, but less than an insurer. The level of security varies depending on the size and quality of the capital buffer, the investment approach, and governance.

3. Run on with the existing employer or a new sponsor

Run on is typically the least expensive option because there is no requirement to hold insurer style capital. It allows surplus to be used for member uplifts or shared between members and the sponsor. The range of possible outcomes is wide.

At one end of the spectrum, a weak covenant supporting an underfunded scheme clearly carries higher risk than buyout or a well capitalised consolidator. At the other end, a well funded scheme supported by a financially strong, trading sponsor and retaining surplus can deliver a much stronger position. In isolated cases, that combination can approach, or occasionally match, the security of other structures. Again, these are specific examples rather than the general case.

Overall, I see run on solutions as carrying more risk than buyout for most schemes, although they can be entirely appropriate in the right circumstances.

Where the Aberdeen Stagecoach deal sits

The Aberdeen Stagecoach transaction is firmly a run on structure with a new sponsor. It is not a buyout and it is not a superfund. The key questions are why the trustees preferred this route and whether it has wider implications for the market.

1. What the Stagecoach scheme looks like today

The Stagecoach Group Pension Scheme comprises three sections: the Main Section, the London Section, and the Sheffield Supertram Section, as disclosed in Stagecoach’s 2023 Annual Report. The combined scheme has a duration of roughly thirteen years, reflecting its predominantly deferred and pensioner profile. Only 4-5% of members remain active. Those active members continue to accrue benefits under Stagecoach.

The scheme is well funded. It is more than well funded. Based on information provided in discussions with the company, the scheme had sufficient surplus to afford a buyout on the day the deal was agreed. This fact sits at the centre of trustee decision making, because trustees were not forced into a run-on arrangement by an affordability constraint. They chose it.

The improvement in the scheme’s funding position is consistent with the broader DB universe. UK DB schemes have moved from small deficits in early 2023 to very substantial buyout surpluses today. The chart below, produced by XPS, illustrates how aggregate DB funding has strengthened over the past two and a half years. Higher long term bond yields have reduced the present value of liabilities, equity markets have recovered strongly, and hedging programmes have worked as intended. The journey has not been smooth, although the direction has been clear. The Stagecoach scheme’s position is simply a scheme level example of what we see at system level.

2. Why trustees may prefer run-on to buyout

It is entirely possible that the trustees had a strong philosophical preference for running on the scheme rather than buying out. This is more common than many people assume. A growing number of well funded schemes choose to continue rather than crystallise their position through a buyout.

There are three main reasons why trustees may think this way.

First, a run-on can deliver higher benefits to members.

Today’s regulations permit, and scheme rules may permit, allocations to members and sponsors. However, today’s regulations limit distributions to sponsors to the surplus on a buyout measure. The new incoming rules are expected to allow all trustees, irrespective of scheme rules, to have the power to distribute surplus to sponsors and to distribute surplus on a lower level of funding, akin to a “low dependency” type basis (rather than the buyout basis). A buyout usually converts almost all surplus into a premium for the insurer, whereas a run-on can preserve it for those who built the scheme in the first place.

Second, many trustees who have lived through twenty years of deficits finally see some daylight and may prefer to finish the journey themselves. There is often a strong emotional and professional instinct to complete the job rather than hand the final step to an insurer.

This instinct becomes easier to understand when you look at the longer term picture. The chart below illustrates how aggregate UK DB funding swung from deep deficits to substantial surpluses over the past decade. Trustees who lived through that journey may feel they have earned the right to complete it themselves.

Chart source: PPF Purple Book 2025

Third, not every sponsoring employer wants immediate removal of its scheme. Some sponsors are willing to support a run-on if they can share in any future surplus, which is now easier under the revised legislative framework (I note that under the current regime it is not easy but it is not impossible).

Funding positions strengthened because equity markets recovered strongly and long term bond yields increased materially over the past five to ten years. Higher bond yields reduce the present value of future pension payments, which improves funding. These two forces combined have created a broad wave of surpluses across the DB universe.

There are 4,840 private sector DB schemes in the United Kingdom according to the Purple Book (see table below). Most are well funded today, although that is not a natural or permanent state. It is very easy to forget that from roughly 2000 to 2020, deficits were the norm and surpluses the exception. When I qualified as an actuary in 1997, most schemes were comfortably in surplus and many employers were enjoying contribution holidays. We then went through more than two decades where deficits dominated, driven by falling interest rates, poor market returns, and rising life expectancy. Remembering that context is important when considering trustee preferences today.

Chart source: PPF Purple Book 2025

3. Why Aberdeen did this and why it fits their business

This deal increases Aberdeen’s assets under management and administration (AUMA) by approximately £1.2bn, although the strategic importance of the mandate is more significant than the quantum. These liabilities are predictable and long dated, which makes them well suited to cash flow matching, an area where Aberdeen already has genuine capability. Several insurers that write bulk annuities do not have in-house asset management arms, so they outsource the management of their matching adjustment style portfolios. Aberdeen is one of the managers that provides this service and therefore has meaningful experience in liability driven investment structures.

Aberdeen continues to employ a decent number of actuaries. The group is no longer operating a full insurance subsidiary, so the actuarial footprint is smaller than in the past, although it remains more than sufficient to support the modelling, risk assessment and oversight required for this scheme.

Aberdeen receives actuarial advice on specific topics such as longevity, and the interaction between assets and liabilities under stress. Longevity risk, which is simply the risk that members live longer than expected, remains with Aberdeen. It is not hedged, and this is the same position as in Aberdeen’s own DB scheme.

The attraction for Aberdeen is clear. They gain a long-dated book of assets, a share in any surplus that emerges, and a relationship that is significantly more likely to remain with Aberdeen for the long-term than other mandates.

4. The asset strategy and risk management

The trustees and Aberdeen intend to hedge interest rate and inflation risk. Cash flow matching sits at the centre of the approach. Since Aberdeen already manages matching adjustment style portfolios for several insurers, extending this discipline to the Stagecoach scheme is a natural step. Hedging will be rebalanced frequently, either daily or weekly, in line with standard practice for liability driven portfolios.

The strategic asset allocation will include a meaningful exposure to private markets. This will likely involve private credit, private equity, real estate, and public markets. Listed equities will likely form part of the mix. Aberdeen referred to a significant allocation to private markets, although the overall exposure is likely to be somewhat lower than in a typical matching adjustment portfolio used by insurers.

It is helpful to view this in the context of wider UK pension scheme investment trends. The chart below shows how DB schemes have steadily reduced their equity exposure over the past two decades, although equities still play a meaningful role, particularly in run-on arrangements where trustees and sponsors are prepared to accept a measured degree of market risk.

Under Solvency II, listed equities attract a capital charge of approximately 39% (though reforms under Solvency UK are likely to reduce this slightly), which is so punitive that insurers simply do not hold listed equities in their matching adjustment portfolios. The regime creates a clear economic barrier to equity investment for insurers. Aberdeen is not writing insurance business, which provides more flexibility in constructing an efficient portfolio for a run-on scheme.

While insurers face capital constraints on many asset classes, UK DB schemes retain more flexibility in areas such as private debt. The chart below shows that schemes have already built modest allocations to private debt, typically around 7%, while insurers often hold materially higher proportions in matching adjustment portfolios.

Longevity risk remains unhedged. Under Solvency UK, longevity does not have to be hedged, although insurers invariably hedge it because the capital requirement for unhedged longevity is high. Aberdeen does not operate under Solvency UK.

Aberdeen has run the Stagecoach scheme through a sophisticated risk-capital model and reported no concerns about absorbing the scheme within its group risk appetite.

5. How this compares with with-profits

This arrangement has similarities with with-profits, which dominated the UK insurance market when I began analysing insurers. With-profits was the core savings product for decades. Its decline followed the equity bear market from 2000 to 2003, when equities fell three years in succession. Many with-profits funds were invested up to 70% in equities, while the liabilities were essentially fixed. This lack of matching created severe strain and smoothing mechanisms could not absorb the losses.

M&G remains the only major insurer still actively selling with-profits through its PruFund range.

The Aberdeen structure is very different from the old with-profits model. Interest and inflation risks are hedged, and cash flows are matched, which significantly reduces volatility. Modern stochastic modelling also encourages much tighter matching. Regulation is much stronger today and imposes greater discipline. For these reasons, I am not concerned that the historical with-profits scenario could repeat in this context. The analogy is helpful as a reference point but should not be overstated.

6. Superfunds and why this is not one

When I worked at RBC, Superfunds were widely discussed. Consultants were enthusiastic and presented them as the next major development in the DB landscape. The fee potential for consultants was substantial, which explained a good portion of the enthusiasm. I was always cautious. My view then was that economic reality and regulatory delay would limit the scale of the market. That view has been borne out.

The original Superfund regime proposed three gateway tests, although this has now been simplified to one. Trustees must demonstrate that a buyout is not affordable in the foreseeable future. If a buyout is affordable, a Superfund transfer cannot proceed (though the Regulator retains flexibility for borderline cases).

Clara has been the only active Superfund to complete transactions. It has carried out more than one, although the overall footprint remains small. TPT has announced its intention to operate within the Superfund framework but has not yet completed transfers.

Superfunds have struggled because the regulatory regime took years to settle, capital requirements are demanding, trustee caution is high, and only schemes unable to afford buyout qualify. Today, most schemes are strong enough to afford or approach buyout, which sharply limits the market.

The Aberdeen Stagecoach arrangement sits entirely outside the Superfund regime. The scheme could afford a buyout. The structure does not involve external capital providers. Aberdeen becomes the employer, which is not how a consolidator operates. The gateway test does not apply.

If Aberdeen were to carry out many similar deals, I would expect the Pensions Regulator to consider whether the boundary of the regime should be revised. Aberdeen has not confirmed any intention to build a business based on this model.

7. Surplus rules and why they matter

Today, extracting surplus from a DB scheme can be challenging. However, revised rules expected to come into force will make it easier for employers to receive a share of surplus, subject to trustee agreement and member protections. The rules also specify how surplus can be used to uplift member benefits.

In this case, Aberdeen will receive one third of any future distributed surplus, while members receive two thirds. This framework makes run-on arrangements more viable and provides trustees with more tools when considering how to use a surplus.

8. Consultants and incentives

Since the announcement, consultants have shown significant interest in this structure. Several have approached Aberdeen to understand the potential relevance for other schemes. This is not surprising. I would expect that fees for transactions of this type are likely to be higher and longer lasting than fees for a bulk annuity transaction, which is essentially a single event with no recurring advisory work. This might explain part of the excitement. It does not change the underlying economics or the risk sharing between sponsor and members.

9. Will this model catch on

My view is that it will not become widespread.

Very few asset managers possess the combination of balance sheet resources, actuarial capability, and liability driven investment expertise required to take on DB liabilities. Aberdeen is unusual because it retains actuarial talent, has deep experience in matching adjustment style portfolios, and still carries some of the heritage of its former insurance operations. Most asset managers would not consider taking on this risk profile, and it would not be appropriate for them to do so.

Even if a small number of similar deals emerge, it would have no impact on the bulk annuity market. The vast majority of schemes are already on a path toward buyout or will be once funding allows. Some strong schemes will always choose to run on under their existing employers. A very small number may pursue deals similar to Aberdeen’s, although these schemes were never candidates for buyout in any case. The bulk annuity story remains completely intact.

There may come a point many years from now when the Stagecoach scheme becomes sufficiently small that a buyout becomes the natural endpoint. That is a long way into the future and does not alter the economics today.

A further point is scale. Just under 80% of UK DB schemes hold less than £100m of assets, as shown in the chart below. Schemes of that size are not realistic candidates for arrangements like Aberdeen’s. They are simply too small, too fragmented and too operationally inefficient for an asset manager to take on as a sponsoring employer. These schemes will continue to fall squarely into the domain of insurers, either through buy-in or buyout.

10. What it means for Aberdeen shareholders

In terms of scale, the transaction brings approximately £1.2bn of assets to Aberdeen. Aberdeen reported £542.4bn of AUMA at 30 September 2025 and £1.4bn of year-to-date net outflows. The £1.2bn inflow is therefore small relative to total AUMA but large in the context of annual flows. Aberdeen’s Investments division has recorded meaningful net outflows for several years, so an inflow of long-dated, predictable pension assets has real value.

The market reaction was subdued. From the close the night before the announcement to the time of writing, Aberdeen shares have fallen about 1.7%. This is a slight underperformance relative to Schroders, which is up 1.6% over the same period, and broadly in line with the FTSE, which is down 0.5%. There has been no meaningful dislocation in the share price.

My interpretation is that investors are still assessing the implications. This is not a familiar structure for those who follow the asset management sector. The introduction of longevity and market risk, together with additional capital requirements, represents a notable shift from the traditional asset management model. Insurance analysts are comfortable with these types of risks, but asset management analysts generally are not.

The deal is not transformational. It does not alter Aberdeen’s strategic direction or solve the issue of net outflows. However, it provides Aberdeen with a long dated, predictable mandate and potential upside through surplus sharing. The rationale is clear for both Aberdeen and Stagecoach, although it does not imply a structural change in the UK pensions landscape.

Final view

This is an interesting transaction. It reflects strong funding, trustee preference, and Aberdeen’s capabilities. It sits outside the Superfund regime and poses no threat to the bulk annuity industry. It is a bespoke solution for a specific scheme.

There will be occasional deals like this, although only at the margins. They will not alter the trajectory of the bulk annuity market. They simply sit alongside the existing options available to trustees.

In pensions, there is no single correct answer. There is a spectrum of risk and cost, and trustees select the point on that spectrum that aligns with their objectives. Here, the trustees chose a run-on structure, with uplifted member benefits and a new sponsor. That is all this transaction represents.

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Disclaimer
The content of this publication reflects my personal views only and is provided for information purposes. It does not constitute investment advice or investment research, and I am not acting in the capacity of an investment adviser. I own shares in some of the companies mentioned. Readers should carry out their own analysis or seek professional advice before making any financial decisions.