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UK DB pension schemes are better funded than at any point in a generation.1 Rising gilt yields since 2022 have sharply reduced the present value of liabilities, and years of derisking and strong prior returns have left the aggregate funded position at its strongest in decades.
UK DB pension schemes are better funded than at any point in a generation.1 Rising gilt yields since 2022 have sharply reduced the present value of liabilities, and years of derisking and strong prior returns have left the aggregate funded position at its strongest in decades. For most schemes we believe the strategic question is no longer how to close a deficit, but how to protect that hard-won position through the endgame, whether that means an insurance buyout or long-term run-on. In both cases the task is the same: to convert the funded position into a portfolio that reliably pays pension cashflows as they fall due, at the lowest cost in capital and risk.
This challenge is sharpened by a structural shift in the liability profile. As active accrual ceases and membership ages, the gap between pension payments going out and contributions coming in widens. Schemes that were broadly cashflow-neutral a decade ago are now significantly cashflow-negative, creating a practical need for assets to produce reliable income in the right amounts at the right times.
Cashflow Driven Investing (CDI) addresses this by building a fixed income portfolio whose income and maturities are structured to meet the pension payment profile as it falls due, reducing dependence on selling assets to fund benefits. The traditional CDI toolkit is built almost entirely on public IG credit, whose deep liquidity, transparent pricing and reliable income make it well-suited to this role.
The limitation of this approach is increasingly evident. A large and growing proportion of all-in fixed income yield now comes from the risk-free gilt rate rather than from credit spread. With Sterling investment grade spreads hovering near the tightest levels of the past decade, the income earned for taking credit risk is modest. Where the primary job of credit is to generate cashflow, tight spreads directly limit how far a given quantum of capital can cover liabilities.
Exhibit 1: Investors are no longer being compensated for spread risk in public fixed income
Public credit indices compound this through growing concentration: as issuance concentrates in a narrower set of dominant borrowers, large CDI portfolios built from public benchmarks increasingly hold the same credits in the same sectors. Tight spreads reduce the income available per unit of capital, while concentration limits the diversification within that income. We believe the answer is not to retreat from credit in the face of tight spreads, but to broaden the allocation to include privately originated credit that delivers materially higher spread without departing from investment grade quality.
Fixed Income Replacement is Apollo’s framework for expanding the parameters of traditional fixed income to include privately originated investment grade credit alongside public bonds, with the goal of enhancing income while preserving credit quality and downside protection. Portfolios are built to generate income primarily from origination, structure and security selection, rather than from increased market, duration or credit risk.
For UK CDI portfolios, the Fixed Income Replacement opportunity set spans four key pillars:
Together, these four pillars are intended to capture excess spread without moving down the credit spectrum, using bilateral origination, customised structures and certainty of funding in less commoditised segments of the investment grade market. Apollo evaluates opportunities across the pillars on a relative value basis, pursuing the highest risk-adjusted return opportunities while maintaining credit quality and underwriting discipline
This excess spread is not a recent or cyclical phenomenon. Private IG has consistently generated a meaningful premium over public IG through the cycle, reflecting the structural sources of that return rather than compensation for additional credit risk.
Apollo also offers full monthly dealing on its private IG programme, a feature that is uncommon in private credit markets. For UK DB schemes managing liquidity requirements alongside a CDI mandate, this provides a meaningful operational advantage: the ability to access the spread premium of private credit without locking capital into multi-year structures that cannot respond to changing scheme circumstances. This is a topic we discuss further here.
Exhibit 2: Private IG Has Historically Generated 150-200bps of Excess Spread Over Public IG
For a CDI portfolio, the implication is direct: integrating private IG raises the yield on the same capital, so each pound does more work. That efficiency can be spent two ways. For a given liability stream, the blend can match the same cashflows with less capital, freeing the remainder to redeploy or de-risk; or, holding capital constant, it can help match cashflows further into the future.
Exhibit 3: The Same Yield Pickup, Spent Two Ways: Less Capital or a Longer Match
The benefit is not marginal, and either form improves the capital efficiency of the CDI portfolio, a framing that is particularly powerful for schemes making journey plan decisions. A scheme targeting buy-out in five to seven years can use private IG to maximise the productivity of its CDI allocation over that horizon. A scheme choosing run-on can use private IG to extend the CDI match further into the future, reducing reliance on growth assets to meet later cashflows.
Beyond the cashflow matching horizon, incorporating private IG has the potential to improve the CDI portfolio in two further respects.
Diversification. Public IG indices have grown increasingly concentrated in a narrow set of issuers. A CDI portfolio built from public indices accordingly inherits this concentration, with large portions of spread exposure correlated to the same market technicals and macro factors. Private IG introduces genuinely differentiated sources of spread that are structurally uncorrelated with public market movements.
Income protections. Private IG transactions are typically better protected than comparable public bonds through contractual terms that restrict how much debt can be added ahead of them, limit subordination, and provide stronger covenants and information rights. These protections can help improve the level of certainty that contracted cashflows are received in full, reducing expected loss in stress scenarios, which is precisely the resilience a CDI portfolio depends on.
Exhibit 4: Private IG Diversifies Away From Public IG Sector Concentrations
For schemes now focused on the endgame, the quality of the CDI portfolio will increasingly determine how much capital is required, how much residual risk remains, and how efficiently the scheme reaches buy-out or sustainable run-on.
Public IG credit remains the cornerstone of any CDI framework: liquid, transparent, and reliable. Typically, a public-only approach can be capital-intensive relative to the income it generates. Schemes that rely solely on public IG must either deploy more capital to match the same liability horizon, or accept a shorter match and carry residual risk into later years.
Private IG credit offers a compelling solution. By pairing investment grade credit quality with a spread premium of 150–200bps compared to public credit,2 it allows schemes to match materially more pension cashflows for the same capital, or the same cashflows with less capital. This has the potential to improve the efficiency of the CDI portfolio and the productivity of the overall fixed income allocation.
Footnotes:
1. Source: Pension Protection Fund, The Purple Book 2025.
2. See Exhibit 2.
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