A New Era for DB Pension Risk Transfer

The recently announced agreement for Aberdeen to take over the sponsorship of the DB pensions of Stagecoach [1] marks an evolution in the UK pension risk transfer market.

Traditional fiduciary management focuses on setting, managing and evolving investment strategies for DB schemes, whilst OCIO arrangements go further by absorbing operational responsibilities which can include the integration of legacy investment staff into the OCIO's operations. But in both of these cases the legacy sponsor still bears the ultimate financial risk of the DB scheme.

Beyond FM and OCIO

The Aberdeen-Stagecoach transaction has arguably gone one step further than OCIO. Aberdeen as the new sponsor assumes the entire financial and operational risk of the pension scheme, at the same time operating as the investment manager for the pension scheme's £1.2bn assets. Stagecoach as ceding sponsor thus achieves a clean exit without the scheme leaving the trust-based DB pension framework.

This structure occupies territory between low-dependency run-on and insurance buyout. Like a buyout, it delivers complete risk transfer for the exiting sponsor. Unlike a buyout, it avoids the insurance (Solvency UK) regulatory regime.

Insurers must hold explicit capital buffers, target robust solvency ratios, and navigate prescriptive regulation. These requirements provide security but increase costs.

By remaining within the pensions regulatory framework, this structure relies on sponsor strength rather than explicit capital backing, potentially allowing lower buffers to be held, surplus to be released in the short, medium and long term and greater investment flexibility to generate those surpluses.

The investment dimension is noteworthy. Insurance portfolios mostly consist of gilts, bonds, liquid and illiquid credit structured to match liabilities well. Conservative strategies are encouraged by regulation that penalises mismatched strategies by requiring higher capital buffers to be held. A non-insurance structure offers potential for additional flexibility - whilst maintaining a high degree of liability matching. Further diversification can be achieved through the inclusion of alternatives and private market investments, potentially generating higher returns, and leading to additional surplus to be shared between scheme members and the new sponsor.

Market Implications

Potential market implications are many. For pension schemes, it opens a new endgame route. Schemes finding buyout unattractive may find this model fits better, particularly larger schemes with strong internal governance.

For the market, it validates non-insurance approaches to risk transfer. Other asset managers may explore similar structures, creating competition that could pressure traditional buyout pricing, or that can lead members to further benefit from more favourable surplus sharing arrangements that can arise due to competition for the combined role of sponsor and investment manager.

For ceding sponsors, the menu of endgame options expands. More competition and choice should improve outcomes, though comparing different risk transfer structures requires sophisticated analysis.

Strategic Implications for Fiduciary Managers

For fiduciary managers (FMs), in particular, this development creates a critical strategic decision point: will they prove to be capable of helping schemes navigate this increasingly complex endgame landscape?

The capability question is existential. 

FMs risk obsolescence as schemes already in surplus face choices between retention and full risk transfer to insurers or sophisticated run-on solutions that require deep technical expertise to manage. FMs must honestly assess whether they have or can quickly obtain the capabilities needed to remain relevant.

Technical depth becomes a differentiator. Success requires moving beyond basic investment management to encompass advanced risk management capabilities, actuarial know-how, and strategic expertise in surplus generation and management. This is fundamental capability building not just incremental improvement.

Surplus management expertise will be in demand.  Those FMs who position themselves to credibly advise on surplus management - and facilitate the creation and transfer of value to scheme members - will find themselves increasingly sought after. This means understanding not just how to invest to generate surplus, but how to advise around surplus retention requirements to manage residual risks and to guide the strategic decisions that lead to the effective use of surplus for member benefit.

The firms that thrive will be those that can move beyond selling investment capabilities to forming genuine strategic partnerships, helping schemes make better-informed endgame decisions through technical excellence and sophisticated analysis. Those unable or unwilling to build these capabilities risk being bypassed, leading to longer term obsolescence.

Conclusion

The Aberdeen-Stagecoach deal represents genuine innovation—comprehensive risk transfer outside of insurance regulations, offering potential advantages in cost and investment flexibility while delivering value to the members, the ceding sponsor and the receiving sponsor.

The DB pension endgame landscape has become richer and more complex, rewarding those who can master that complexity on behalf of their clients.

The Surplus Management Framework provides a toolkit to support and govern these endgame decisions. Those equipped with such analytical capabilities can help schemes capitalise on run-on opportunities, enabling opportunities for sponsors to share upside in exchange for the risks underwritten, and enabling meaningful benefit enhancements for members.

For Fiduciary Managers, the ability to help schemes navigate endgame complexity, particularly around surplus management and value creation, will separate those that will remain relevant in UK DB from those that will not.

Reference

[1] https://pensionsage.com/pa/Stagecoach-Pension-Scheme-agrees-1.2bn-run-on-deal-with-Aberdeen.php