Pension Talks Interview: Joe Vermeulen

This month, we spoke to Joe Vermeulen, Head of Solutions Design at Insight Investment who talks about the shifting DB pension landscape as stronger funding, healthier balance sheets and robust risk management have transformed schemes from legacy liabilities into strategic financial assets capable of generating surplus and much more.

1. The DB Pension landscape has changed significantly in the past few years. What are the current key opportunities and risks for trustees and sponsors?  

The UK DB landscape has undergone a profound shift in recent years. Stronger funding levels, healthier balance sheets and a far more resilient approach to risk management mean that many schemes now occupy a position unimaginable even five years ago. As a result, DB pensions are no longer viewed simply as legacy obligations but increasingly as valuable financial assets, with the capacity to generate surplus and even to serve a wider economic purpose. It’s striking how, unlike back in the nineties, these surpluses are ‘real’, backed in large part by gilts – the safest assets available.
 
For trustees and sponsors, this creates an opportunity to rethink a scheme’s future. Running on has become a credible and often compelling alternative to buyout, offering the potential for a meaningful financial boost for corporates and the possibility of cash lump sums or improved terms for members, while still offering robust security for people’s pensions. These could translate into long-term benefits as schemes could aim to grow their surplus over time. If DB schemes pursue such approaches at scale the implications would extend across the economy: DB schemes would retain their long-term investments in the gilt market, corporate growth receives a boost, and the government receives tax revenues from DB schemes releasing surplus assets.
 
As for risks, as DB schemes hedge most of their financial risks, longevity risk – the possibility of members living longer than expected – becomes the most significant remaining uncertainty for schemes deciding to run on. Recent innovations mean that longevity hedging is becoming all the more accessible for UK DB schemes, so even this risk could be mitigated for many.
 
For schemes targeting insurance buy-out, constraints on insurer capacity mean that timing and pricing can be unpredictable, and the expansion of strategic options means that trustees will need to demonstrate they have considered all the options in light of their fiduciary duty to seek out the best outcome for members. The landscape is far more positive, but also more complex, demanding thoughtful and informed decision‑making. We are encouraging our DB scheme clients to, at the very least, hold off making an irreversible decision: time is their friend.

1. How are surplus reform proposals likely to change sponsor behaviour?

The Pension Schemes Bill includes measures to enable and encourage DB schemes to release surplus where it is secure and appropriate to do so. The ability to access surplus safely is what transforms a DB scheme from a balance‑sheet burden into a financial strength. Sponsors are likely to become more supportive of releasing surplus and running schemes on.
 
For corporates, surplus release could support investment, R&D and broader balance‑sheet flexibility. It means their DB schemes can become a strategic asset that, in delivering a stream of predictable income, could offer them a competitive edge. For example, if the mandatory requirement for companies’ contributions to defined contribution (DC) pension schemes were to increase, companies able to repurpose DB surpluses to fund their DC schemes could have a clear financial advantage.
 
But trustees will need to ensure any surplus released remains in the interests of members. A key consideration here is the minimum threshold beyond which surplus might be released. The more conservative this threshold is, the less surplus might be released. Recent debates in the House of Lords suggest that the government is considering setting a minimum threshold in line with the ‘low dependency’ basis, which The Pensions Regulator defines as a level which means a scheme is very unlikely to need any future contributions from its sponsor. It seems likely that many trustees may allow surplus release but seek to do so with a buffer over this minimum level.

1. What is the future for small DB schemes?

With consolidation, insurance capacity constraints, rising governance expectations, and the push toward value for money, what does the endgame really look like for small schemes, and should we expect more forced consolidation?
 
Small DB schemes, which might be those with liabilities below around £100 million, face a distinct set of structural challenges. It can be harder for such schemes to achieve the governance standards, operational resilience and investment scale exhibited by larger schemes. As the DB universe continues to mature, these pressures are becoming more acute.
 
It therefore seems that consolidation in one form or another for smaller schemes is likely. Some will seek to secure buyouts when market conditions allow, while others may take wait to advantage of future consolidator models, such as commercial superfunds. The recent Stagecoach deal, in which the company’s DB scheme was transferred to a new sponsor, demonstrate that innovative solutions are gaining traction.
 
For small schemes, therefore, the future will probably be one of gradual convergence into larger, more resilient consolidation vehicles. This is not a failure of governance, but a recognition that long‑term security is best achieved through scale.

1. How should trustees rethink funding and risk for end game?

Running on requires trustees to adopt a different mindset from that required for targeting a buy-out as soon as possible. It means trustees viewing a scheme as a long‑lived financial institution whose purpose is to deliver pensions securely over decades. This begins with reframing the funding objective around delivering pensions over the long term, rather than targeting buy-out funding, and could also incorporate a surplus growth target.
 
Risk must also be reconsidered. Once interest‑rate and inflation risks are substantially hedged, the principal challenges become longevity risk, liquidity management and operational resilience. Trustees must ensure that asset portfolios are structured with reliable cashflow generation in mind, and that risks such as collateral management and counterparty exposure are handled with discipline and clear oversight.
 
The sponsor covenant also evolves under a run‑on model. It becomes less about underwriting deficits and more about providing stability, clarity and confidence that surplus‑sharing or long‑term investment strategies can be implemented safely. Achieving these outcomes requires strong governance: clear delegation, transparent decision frameworks and the ability to respond effectively as the regulatory landscape evolves. When designed and managed well, a run‑on strategy can offer members and sponsors both security and value, but it must be approached with the professionalism of a long‑term enterprise.

1. What will define the next decade for DB?

The decade ahead is likely to be one of the most transformative in the history of UK DB pensions. The new rules around surplus release will shift the system from a insurance centric model to one in which well-funded schemes can operate on a low dependency basis while sharing surplus with members and sponsors. With many schemes potentially able to release surplus under this new framework, the character of DB pensions will change fundamentally: from trapped capital to a dynamic, multi stakeholder asset. The insurance market will continue to play a major role, but no longer as the near-term default destination for DB schemes’ endgame planning.
 
We should expect the investment landscape to shift as well. Well-funded DB schemes hold large pools of long dated capital: while much of this will remain in gilts, as they pursue surplus growth, these schemes will have sizeable portfolios well suited to supporting long-term productive assets such as UK infrastructure and green finance.
 
Trustees and sponsors will navigate this environment in light of the value and timing of surplus release, the relative merits of run-on versus buy-out, the robustness of low dependency funding frameworks, insurer pricing dynamics, longevity trends and the strength of the sponsor covenant.
 
Taken together, these developments point towards a more flexible, resilient and economically engaged DB system — one where well capitalised schemes play a long-term role in supporting both member security and the broader economy, rather than exiting the stage through buy-out as quickly as possible.