Lots of Debt, Not Much Equity
Two reform programmes are quietly reshaping where the capital behind British pensions sits and what it does. Both fly under the same political banner — “mobilising capital for growth” — and both trace back to Jeremy Hunt’s 2023 Mansion House speech, continued and accelerated by Rachel Reeves.
But they work very differently, they operate at very different scales, and neither does quite what the headlines imply. For ShareSoc members, the gap between the rhetoric and the mechanics is worth understanding.
The Defined Benefit (DB) surplus regime: a modest unlock
The Pension Schemes Bill 2025 makes it easier for trustees of well-funded defined benefit schemes to release trapped surplus back to sponsoring employers.
This theoretically reverses two decades of relentless de-risking. Once surplus has a use, sponsors have a reason to run return-seeking assets to generate it — implying re-risking, more growth-asset exposure, and less idle buffer capital in the system.
In practice, the effect is likely to be modest. The DWP’s own impact assessment models just £8.4 billion released over a decade, half of that to members. The decision to re-risk is effectively a function of covenant strength, not the surplus rules: only a strong sponsor can underwrite the mismatch risk. The calculus is more finely balanced than the “re-risking” headline suggests, and trustees, not sponsors, control the allocation.
The insurance channel: ten times larger, and almost invisible
The far bigger pool of pension-supporting capital no longer sits in schemes at all. A decade of buy-ins and buy-outs has migrated hundreds of billions of pension liabilities onto insurance company balance sheets, where the capital backing them is governed by solvency rules.
This is where the serious mobilisation effort is directed. The Solvency UK reforms — the risk-margin cut, and the matching adjustment liberalisation that took effect in June 2024, accelerated by the Matching Adjustment Investment Accelerator in October 2025 — are designed to let insurers deploy that capital into higher-returning “productive” assets while it stays in place backing the annuities.
Annuity providers have pledged £100 billion of productive-finance investment over the decade. That is more than ten times the DB surplus pool, and it attracts a fraction of the attention.
The catch: it’s debt, not equity
This point is often overlooked in the “backing UK growth” language. The insurance channel mobilises debt, not equity. The matching adjustment only works for assets whose cashflows match long-dated annuity liabilities. The reform widened the test from “fixed” to “highly predictable” cashflows, which pulls in infrastructure debt, social housing and green-energy debt, commercial real estate loans, private credit and structured assets.
But equities, by their nature, produce no contractual cashflow — dividends are discretionary and capital values volatile — so listed equity simply cannot be matching-adjustment-eligible. Even where the underlying exposure is to something real and growth-flavoured, like a wind farm or a housing project, the insurer holds it as debt against the asset, not as equity in it.
So, the £100 billion is a lending programme. It does not flow into the stock market, does not support UK-listed equity valuations, and does nothing for the under-allocation-to-equities problem that successive governments have simultaneously fretted about.
That tension runs right through the policy agenda. Government wants insurance capital mobilised — which the rules deliver as debt — and more institutional money in UK equities. But the equity ambition has to be pursued through an entirely separate set of reforms: the Mansion House Compact, the DC pension “megafund” consolidation, and vehicles like the British Growth Partnership.
The takeaway
There is much to welcome here. Cross-party continuity in economic policy is rare, and the shared recognition across the Hunt and Reeves agendas that pension and insurance capital should be working harder for the economy is a genuinely constructive development. The direction of travel is right, and the willingness of successive governments to unwind over-tight prudential and funding constraints deserves credit.
But there are limits to what these reforms can achieve. The decisive damage was done long ago, from the late ‘70s onwards, when many discretionary benefits were made compulsory and in the late 1990s and 2000s, when the removal of the dividend tax credit, the arrival of mark-to-market pension accounting, a savage equity bear market and an increasingly punitive regulatory regime drove DB schemes wholesale out of equities and into bonds.
As a result, UK pension funds went from holding most of their assets in equities to holding very little, and that capital has since been matched, de-risked, and in large part transferred to insurers. You cannot re-equitise a liability that has already been bought out by an annuity provider.
The current reforms are closing the stable door after the horse has bolted by releasing trapped capital and relaxing rules when the equity risk capital has already drained away. These are sensible corrections, but they arrive a quarter of a century too late to restore what left the system in the first place. The patient equity capital that once underpinned both pensions and the UK market is not coming back through these doors.
Defined contribution (DC) schemes, on the other hand, are young, growing and decades from maturity — the one pool where the timing window is still open.
When ministers talk about unlocking pension capital for growth, it means different things for different schemes. The large, well-advanced, insurance-side effort channels debt into infrastructure and housing. The equity-into-businesses ambition sits elsewhere, primarily in the DC and consolidation reforms, and is far less settled. And the DB surplus regime — the part that generates the most heat about member protection — is, on the government’s own numbers, the smallest piece of all.
Mark Northway, director
