There’s a great article in today’s Times which takes a look at what DB Trustees have been doing with the money that’s been “entrusted” with them. It comes at the topic with the good sense you’ll get from a financial adviser who chooses a risk free benchmark , it’s the good sense you’ll get from Martin Lewis and Paul Lewis for whom risk free is putting t he money in an easy access deposit account. Here’s what financial adviser “Ondra” found.
Savings interest v final salary pension funds
Average annual returns since 2020
| Top easy access accounts – average rate | 3.23% |
|---|---|
| One-year fixed rate savings – average rate | 3.72% |
| USS pension scheme | 1.70% |
| Airways pension fund | -1.73% |
| BT pension fund | -6.80% |
| Shell contributory pension fund | -3.50% |
| Railways pension fund | 2.3%* |
“Part of the reason that the British economy has been so emasculated is because of an obsession with eliminating risk,”
said Michael Tory, the chairman of the financial advice firm Ondra.
He is right. We have decided that risk free is doing badly with investment because we’re doing well with our liabilities. We aren’t doing “well” our liabilities (to pay pensions till death) have not changed, we are simply measuring them at a different discount rate. So pension deficits have turned into surpluses despite the fund failures detailed above.
We are not the happier for abandoning DB pensions. Of course , we are aware that the consequence of abandoning certainty has been unhappiness for pensioners , those approaching and those some way from retirement. This is a statement from Standard Life
People may feel guilty that they are not/have not done enough for themselves , this despite auto-enrolment into workplace pensions which came in 2012-18.
How we put things right
So if we can’t stand uncertainty and can’t afford certainty, what can we do? I suggest that we need to put our trust in investment.
sang David Byrne back in 1980, Toby Nangle asks the question Byrne sang next..
If you looked at what’s most available to most trustees of pension schemes, you would probably find yourself with US equities, which Toby suggests have offered a ten year return of between 6-7% since 2013.
Of course we could see the same numbers from the UK if our money made our money stocks perform again.
We ought to ask ourselves why we think that negative returns on assets are satisfactory so long as funds are in surplus. We do you know- even though positive returns seem to be there for anyone. But this is the argument of Megan Harwood-Baynes in the Times
Leading pension funds are missing out on billions of pounds by playing it safe with their investments, experts have warned, with many returning less than high street savings accounts.
Measures in November’s budget placed a huge emphasis on investing, including the planned drop in the cash Isa allowance for under-65s, as the chancellor tries to stimulate the British economy.
But some defined benefit (DB, also known as final salary) pension funds, which guarantee their members a set inflation-linked income in retirement, are returning as little as 1.7 per cent a year on billions of pounds of investments. These schemes argue that they are “fully funded”, meaning that they have enough money to pay out on their promises to members. They say this means there is no need to raise high returns or take risks that could involve losing money.
Megan Harwood-Baynes
She’s right , Toby Nangle’s right and Michael Tory is right. Just who thinks the waste of opportunity from the likes of these big pension schemes is prudence? It is not prudence, it is a waste of money.
Recent data shows US endowment 5-year average annualized returns around 8.3% (as of FY2024), though returns vary significantly by year and endowment size, with larger endowments often outperforming, targeting long-term real (inflation-adjusted) returns of about 5%.
A strong 2025 fiscal year saw many major endowments posting double-digit gains, following weaker periods, indicating fluctuating but generally positive recent trends, reports NACUBO and Forbes.
Endowments invest, I think, to pay future salaries and research costs.
Are large UK DB schemes “investing” to pay future pensions really that different?
US endowments estimate future liabilities by projecting required annual payouts (often 4-5% of assets) for operations, scholarships, and capital needs, balancing this against investment returns, anticipated gifts, and potential tax impacts.
They use quite complex models to ensure long-term purchasing power preservation through spending policies that smooth volatility and account for inflation, often focusing on liquidity ratios to manage cash flow for near-term needs.
Key considerations include forecasting background income, managing liquidity for illiquid assets, and adapting spending to market conditions and donor pressures.
As a fully opened shared ambition defined benefit pension scheme invested to meet the projected liabilities of the Scheme, in their Accounts to the 31st March 2025 the UKAS Pension Scheme published the historic investment returns achieved by the scheme as follows:
The investment returns achieved by the Scheme:
2025 2024
1 year to 31st March 3.1% 13.8%
5 years to 31st March 8.4% p.a. 6.3% p.a.
10 years to 31st March 6.8% p.a. 7.2% p.a.
15 years to 31st March 8.3% p.a. 7.5% p.a.
(The returns to the 31st March 2025 were depressed by the pending “Liberation Day” tariff announcements by Donald Trump).
https://www.ukas.com/wp-content/uploads/2025/09/UKAS-Scheme-Accounts-2025-signed.pdf
There were no magic investment policies followed to achieve these returns – it was essentially a 70%/30% growth/income split using passive index trackers. The main feature was that the liabilities targeted were the projected future cash liabilities of the Scheme and not the commercially determined price charged for a bulk annuity purchase.
I believe all pension trustees should publish their long term investment returns.
Commendable returns from
a relatively small UK scheme, PCB, which seems to give the lie to the suggestion that large (or consolidated) schemes will inevitably perform better.
I don’t imagine USS like to be compared to the Trinity College Cambridge endowment either.
http://www.trin.cam.ac.uk/about/college-notices/trinity-college-and-uss/
http://www.trin.cam.ac.uk/about/endowment/
The TCC endowment is comprised of a diversified portfolio of property and equities.
Thanks Derek Scott, this will be of interest to one of our regular contributors whose daughter is a don at Trinity College Cambridge. Good to read about the TCC endowment
Commendable returns, PCB, from
a relatively small UK scheme, which seems to give the lie to the suggestion that larger (or consolidated) schemes inevitably perform better.
I tried asking the trustees about investments in the BT Pension Scheme 5 years ago and got no response at all, not even an acknowledgement.
A couple of years ago I went through the figures for the BTPS when the triennial valuation came out. As far as I could work out, there had been a loss of about £16.9bn in net asset value after allowing for payment of pensions in that period. There may well have been some dubious accounting involved, but in practical terms non of that loss would have occurred if the assets had simply consisted of cash kept under a mattress. If they had been held in a FTSE all share tracker fund they would have risen by 30% over that 3 year period.
I asked one of the trade unions representing BT staff about union nominated trustees and got the response “The trade unions are involved in the selection process for the member nominated trustee directors, but a key part of that process is ensuring that the selected candidates understand their fiduciary duties to act in the interests of all scheme members (and not as a member or employer advocates).” They also said “But, in any case, the employer’s position on the pension scheme’s investment strategy is not something that is covered by our recognition agreement with them.”
So much for the hope that trade unions will look after their (current and retired) members interests in relation to pensions or the deficiency payments the employer was making.
“I tried asking the trustees about investments in the BT Pension Scheme 5 years ago and got no response at all, not even an acknowledgement.”
The figures for a pension scheme can in many cases be calculated from the public available information contained in the Pension Scheme Note in the sponsoring employer’s accounts. The Note should show the opening and closing balances, the cash flows in and out of the pension scheme. However short term measures may be distorted by timing differences and long term analysis require digging out multiple previous years accounts from the Companies House website.
It might be a valuable academic paper if a researcher used this data in an analysis of comparative achieved returns by pension schemes following different end game paths. It is likely to show the true value of the losses sustained by British employers supposedly trying to reduce risk by transferring their defined benefit liabilities to the insurance sector.