Bell Curves : A Five Chart Take on Defined Benefit Pensions

For members : More likely : Downside improbable
For Government : A gilt and growth opportunity

The Pensions Minister loves charts.  Here are three charts central to a powerful risk-benefit exercise.  They transform the analysis of the prospects for scheme members and sponsor.  They also show DB schemes can add to the Government UK growth story by continuing in the pension sector.

• Run schemes on and there is great opportunity for more – discretionary payments phasing the use of surpluses to benefit all stakeholders.
• Risk of less is negligible for members when you combine a strong sponsor, fully funded scheme and the PPF.  Buyout is not an improvement

Where’s the pension money gone?  More charts.  One shows that the longevity tables the pension industry produces led to vast syphoning of resources out of UK.  The other shows what regulatory backed derisking programme did to asset allocations.  They explain the unfortunate costly economic impact of DB schemes over the last decade.  

Torsten Bell as a chartist and pensions minister should be taken with them all.

Now what?  Straight forward corrective actions will help bring growth back to UK:  Coordination of regulation; scrutiny and incentives to invest in UK economy long term.  And for Government – all hands on deck to protect the UK gilts market.
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Opportunity for more:  Exercising discretion

This chart shows a scheme’s assets over time and shows a cumulative amount of surplus paid out.  Run-on is itself attractive.  Government can make it more attractive to hold more in UK assets.  Run-on helps protect the UK gilt market.

Chart illustration: This is a £800 million scheme and an actual payment schedule.  Investment return of gilts+2% with annual distribution between sponsor and members of 1.5% of assets.  A flexible distribution starting at 2% and increasing to 3% from year 20 as pension payments start to fall is shown.  The chart shows that even with a significant payment out of surplus assets the scheme continues to generate surplus as it matures.

Members can reasonably expect annual discretionary payments adding over 10% to pensions – with higher one-off payments possible.

“Informed Decisions” are required of trustees by Government.  They now have scope to “exercise discretion”.  Have your own model; take your time; phase payments; adjust to investment and demographic scheme experience.  Study the variables.

Risk of less is negligible

Starting with an investment grade sponsor with a scheme at low dependency – the risk is negligible.  There are the two largely uncorrelated factors of sponsor collapse and investment strategy failure.

The safety nets behind run-on and buyout are PPF – uncorrelated risk and FSCS – correlated sector specific risk (no Government guarantee).  PPF has some haircuts but is well funded stop loss:  FSCS is a political risk with no stop loss.

How much less for a pensioner in PPF:  Protecting real pension values
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The member is interested in “the buying power of a pension”, said Sir Roy Goode even as he advocated inflation caps in 1997.   PPF offers protection up to 2.5% per annum.  Schemes’ own caps are between 2.5% and 5%.  Only the exercise of discretion protects the real value of a pension from spikes – as in the early 2020s.
This chart shows how big discretionary increases need to be to eliminate downside.  What that means is extra payments, if the scheme does not enter PPF, are all upside.  Real inflation risk protection needs to be the focus.

​(Or what discretionary increase completely eliminates downside while providing material upside.)

Deferred members have a 10% haircut to their pension but good inflation protection while scheme avoids PPF.

CMI Longevity Tables – impacts

​Life insurers and reinsurers volunteered to produce longevity tables for IFoA’s CMI subsidiary.  They are used by the industry as standard.  They overstated life expectancies substantially.  Tables assumed “cohort” improvements would be large and sustained.  They were not.  When PRT took off, the impact was to syphon £ billions to insurers.  One year is 3% of liabilities – no impact on assets.  ONS period data is for actual mortality.  Longevity risk transfers have cost schemes well over £10 billion since 2018.

​Asset Allocation Trends of DB Schemes:  The triumph of bonds

        (graphic source PPF Purple Book 2025)

Nobody said “that’s enough derisking”:

The shift to bonds and primarily UK gilts was pronounced and provided Government with cheap money.  Then came the rise of buy-ins and buyouts.  Bulk Pension Annuities are now a major overhang for the gilts market.  Insurers sell gilts to buy global (privately originated) debt – pushing up UK interest costs.

So the pension “Gold Standard” being pushed by regulators and life insurers enjoying the benefits of regulatory easing of Solvency II and Solvency UK reducing their business costs caused a fall in UK asset allocations and higher interest costs as gilt issuance was crowded out by annuity policy issuance and gilt sales.  A “head in the hands” public policy moment.  New approaches are available.

Derisking benefitted the gilt market.  Equities were considered too risky.  UK equities were picked on for disposal.  46% to 5% between 2008 and 2025 holdings.  But the gilt market has itself become the victim of derisking with the rise of BPAs issuance.

So far £350bn BPAs have resulted in £120bn net sales of UK gilts.  Given trends of recent years, at around £50bn of deals would mean by 2035 BPAs would be £950bn and a further £210bn of gilts will have been sold.  Total “imposter gilts” from global life insurers would be £1.3 trillion.  Approximately two thirds of current gilts in issue.  That is some crowding out.  Action needed.  

As said by Torsten, “when the charts are this bad – stop drawing them and start trying to change them.  Over to you Torsten.