Leading pension funds are missing out on billions of pounds by playing it safe with their investments, experts have warned, with many returning less than high street savings accounts.

Measures in November’s budget placed a huge emphasis on investing, including the planned drop in the cash Isa allowance for under-65s, as the chancellor tries to stimulate the British economy.

But some defined benefit (DB, also known as final salary) pension funds, which guarantee their members a set inflation-linked income in retirement, are returning as little as 1.7 per cent a year on billions of pounds of investments. These schemes argue that they are “fully funded”, meaning that they have enough money to pay out on their promises to members. They say this means there is no need to raise high returns or take risks that could involve losing money.

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For example, the Universities Superannuation Scheme is the largest DB scheme in the UK, and also has members on newer defined contribution (DC) pensions, where what you get in retirement depends on how much you pay in and how your investments perform. The scheme overall has returned an average of 1.7 per cent a year over the past five years. It has £73 billion in assets and at the end of March 2025 the DB part of the scheme had an estimated £10 billion surplus.

The fund previously had a deficit, however, and savers and employers were asked to pay more. When it returned to a surplus at the start of 2024, member contributions were reduced from 9.8 per cent of pay to 6.1 per cent and employer contributions were reduced from 21.6 per cent to 14.5 per cent.

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The analytics firm Moneyfacts looked at the best easy-access rates available to savers with less than £10,000 over the past five years and said that the average interest rate worked out at 3.23 per cent. For variable cash Isas, the average was 3.21 per cent and on one-year fixed savings accounts it was 3.72 per cent.

The Airways Pension Scheme, run by British Airways, also a final-salary scheme, has made average losses of 1.73 per cent a year over the previous five years, and average gains of 1.29 per cent a year over the past decade.

“Part of the reason that the British economy has been so emasculated is because of an obsession with eliminating risk,” said Michael Tory, the chairman of the financial advice firm Ondra.

“The system is entirely focused on risk elimination with no recognition that risk and return are inextricably linked in any capitalist system.”

Playing it safe

The pensions advice firm Hymans Robertson said its research suggested that 67 per cent of DB scheme members thought the long-term security of their pensions was their priority.

Edmund Truell, a former venture capitalist who now runs a charitable foundation focusing on conservation, said that after the 2008 financial crisis the pension regulator pushed funds to “de-risk. “They were told: You’ve got to buy government bonds, you’ve got to buy gilts because they are safe,” he said.

But government bonds, he said, have returned around 1 per cent a year — a gain quickly wiped out by inflation.

Tory said that many British pension funds began selling their holdings in UK companies. “I’m convinced that the chronic shortage of long-term risk capital is one of the factors behind the UK’s dismal productivity record. Some of the best companies this country has ever produced are now foreign-owned,” he said, citing Deep Minds, which was bought by Google and is now at the heart of the tech giant’s AI business.

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What it means for the economy — and pensioners

DB schemes guarantee a set income for life in retirement, unlike DC schemes. They are not common in the private sector any more because they are so expensive to provide. Many have closed to new members but those that are still open have combined assets of about £1.4 trillion. This failure to invest more than £1 trillion in the UK economy is holding back UK economic growth, Tory said.

The chancellor has been pushing for UK pension schemes to increase their exposure to private equity investing. In May some 17 firms signed up to the Mansion House accord, agreeing to invest at least 10 per cent of DC pension funds into private assets by 2030. And while this does not come without risk, the same focus has not been applied to DB schemes.

Tory said: “We were once a country, an economy, that was adventurous, risk-seeking and where British-owned companies were innovating and raising capital for growth, and buying companies from other countries.”

Truell said that in the case of the universities’ scheme, better returns would have meant “no need to increase everybody’s contributions. It’s an example of where decent investment returns go straight into the pockets of members.”

The Universities Superannuation Scheme said its investment approach was focused on achieving the returns necessary to meet members’ promised pensions, as well as taking into account regulatory requirements and “how much risk the scheme’s sponsoring employers can support”.

It said the scheme was now in surplus “indicating that our growth-oriented strategy, broadly supported by employers, is doing the job it is designed to do.

“Around half the scheme’s assets are invested in the UK, including almost £13 billion in private assets. We welcome the steps the government is taking to encourage further investment.”

The Airways Pension Scheme was contacted for comment.