Q. “If DB pensions had been invested for growth?” A. “Actuaries would have a DB pension future…”

henry tapper

1 month ago

That’s my answer on what would happen if Pension Funds had followed a pathway modelled by Barnett Waddingham’s Andrew Smith

This blog is his…apart from some comments from Andrew Young at the end.

If UK private-sector DB pension schemes had been 100% invested in global equities, they’d now be sitting on a £3.7 TRILLION surplus 📈

Last year I estimated the surplus would have been ~£3tn and so the strong equity performance of 2025 has added £0.7tn (note: my modelling is simplistic and has been done for interest – some caveats/detail in the comments).

£3.7tn is more than:
– Total UK government debt: ~£2.9tn
– The market cap of the FTSE All Share: ~£2.7tn
– UK GDP: ~£2.9tn

What if schemes had been invested entirely in UK equities? Although they’ve lagged global markets, there’d still be a healthy surplus of £1.1tn (although presumably UK equities would factor in some of that surplus, driving higher valuations and a bigger surplus). It would also have been a roller coaster ride, with a deficit of ~£1.4tn during the early Covid period 🎢.

What could be done in this parallel world with a surplus of £3.7 trillion?

1️⃣ John Hamilton would be delighted, with DB schemes easily able to provide full inflation protection. I reckon £0.2-£0.3tn would cover that (very finger in the air).

2️⃣ Enhance member benefits more generally, e.g.:
➖Uplifting pensions (in theory they could be more than trebled).
➖Funding accrual, perhaps even for younger generations (yes please!).
➖Funding improved levels of DC contributions.
➖Making substantial lump sum payments (once authorised payments!).

3️⃣ Return it to sponsors. If paid as a one-off lump sum that would net the Treasury ~£0.9tn and sponsors ~£2.8tn. A huge war chest for UK Plc to invest or distribute to their shareholders.

In practice, I’d like to think a combination of the above would happen. Let me know what you think below.

Payments to members/sponsors of these magnitudes would likely have significant economic implications – among other things it would probably be inflationary (increasing liabilities) and increase NHS spending (increasing life expectancies and hence liabilities). Schemes would probably hold back at least a few £100bn to cover off those (and other) risks. Things would probably also have been very different in the interim, e.g. who would have mopped up all that cheap government debt?

hashtagPensions

Q. “If DB pensions had been invested for growth?” A. “Actuaries would have a DB pension future…”

If UK private-sector DB pension schemes had been 100% invested in global equities, they’d now be sitting on a £3.7 TRILLION surplus 📈

Key assumptions include:

– Discount rate: gilts+1% pa (very prudent for an equity strategy). Other discount rates / discount rate structures are available.

– 100% funded at outset (implicitly assuming any deficit would have been met by sponsor contributions; there have likely been >£200bn of contributions since 2005).

– No schemes entered the PPF or insured liabilities.

– No allowance for benefit accrual (allowing for this would increase the surplus).

– No allowance for benefit payments (allowing for this would reduce the surplus).

– Assuming 4% of assets paid out each year reduces the surplus to ~£2tn.

– Assuming cashflow-neutral to 2015 (i.e. accrual cost covered payments until that point) and 4% net outflows thereafter increases it to ~£3.2tn.

– Different start dates or methodologies could produce materially different figures.

COMMEMNTS?

If pensions had invested for growth; Actuaries would have more of a pension future!

If UK private-sector DB pension schemes had been 100% invested in global equities, they’d now be sitting on a £3.7 TRILLION surplus 📈

Key assumptions include:

– Discount rate: gilts+1% pa (very prudent for an equity strategy). Other discount rates / discount rate structures are available.

– 100% funded at outset (implicitly assuming any deficit would have been met by sponsor contributions; there have likely been >£200bn of contributions since 2005).

– No schemes entered the PPF or insured liabilities.

– No allowance for benefit accrual (allowing for this would increase the surplus).

– No allowance for benefit payments (allowing for this would reduce the surplus).

– Assuming 4% of assets paid out each year reduces the surplus to ~£2tn.

– Assuming cashflow-neutral to 2015 (i.e. accrual cost covered payments until that point) and 4% net outflows thereafter increases it to ~£3.2tn.

– Different start dates or methodologies could produce materially different figures.

COMMEMNTS?

Andrew Young “Unemployed”

If pensions had invested for growth; Actuaries would have more of a pension future!

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