Note: These are my personal views and do not constitute investment advice. See full disclaimer below.

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.

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.