Discover why purposeful run-on is emerging as a credible alternative to buyout for well-funded defined benefit (DB) pension schemes – and how it can unlock long-term value while keeping clients' needs at the centre.
Read this article to understand:
- Why the decision to run-on is back on the table
- Five key considerations for schemes before running on
- The shift in portfolio construction that's needed
As more DB pension schemes reach full funding or surplus positions, the conversation is evolving from “how do we de-risk?” to “how do we optimise?”. For some, the traditional endgame of buyout is no longer the only option. Trustees and sponsors are instead beginning to explore purposeful run-on: a strategic decision to continue managing the scheme with the aim of preserving surplus, enhancing member outcomes, and retaining flexibility.
But purposeful run-on is a deliberate choice rather than a default route, and it requires careful consideration of timing, governance, investment strategy, and long-term risk.
Why run-on is back on the table
Several factors are coming together to make run-on a viable and attractive option for well-funded schemes:
Improved funding levels
The sharp rise in interest rates over the past two years has had a profound impact on UK DB pension schemes, reshaping both the valuation of liabilities and the performance of assets.
Higher discount rates have significantly reduced the present value of future pension obligations, while many schemes – particularly those with diversified portfolios – have seen asset values remain resilient. This combination has pushed many schemes into surplus territory, often for the first time in decades.
Regulatory flexibility
While buyout remains the gold standard for risk removal, the Pension Schemes Bill 2025 has introduced new flexibilities that make purposeful run-on a more viable and strategic option.
Notably, trustees will gain statutory powers to amend scheme rules to allow surplus payments to sponsors – even from ongoing schemes – without needing to fully insure first. This marks a shift in regulatory tone, recognising that well-funded schemes may wish to retain control, optimise timing, and deploy surplus more productively
Pricing dynamics and member profile
Buyout pricing is influenced by a range of market and regulatory factors, such as interest rates, credit spreads, and capital requirements. But it’s not typically the key driver for choosing to run-on.
For schemes with a significant proportion of non-pensioner members, purposeful run-on can offer greater strategic flexibility. Over time, the member profile of a scheme will naturally shift, and the proportion of pensioners increases.
Given pensioners are generally less costly to insure, schemes running on retain the potential to benefit from more favourable pricing conditions in future. This dynamic, combined with regulatory flexibility, allows trustees to consider timing and member demographics as part of a longer-term strategy.
Sponsor strength
A strong employer covenant – defined as the sponsor’s legal obligation and financial ability to support the scheme now and in the future – is a critical foundation for any DB pension scheme considering purposeful run-on.
A strong employer covenant gives trustees the confidence to take a longer-term view
It gives trustees the confidence to take a longer-term view, whether that means maintaining investment risk, delaying buyout, or deploying surplus strategically.
For schemes where the sponsor is large relative to the scheme size, the covenant is often robust enough to support a low-dependency investment strategy or a multi-year run-on plan.
In these cases, trustees may choose to retain control, optimise timing and preserve surplus, a rather than crystallising it prematurely through buyout.
Key considerations before running on
Purposeful run-on is not without complexity. Trustees must weigh a wide range of factors before deciding whether to postpone buyout.
1. Timing and market conditions
The timing of a buyout can have a material impact on value. Insurer pricing is sensitive to interest rates, credit spreads, and capacity constraints. Transacting during periods of market dislocation or reduced insurer appetite may result in less favourable terms. Purposeful run-on allows trustees to monitor these dynamics and retain flexibility to transact when conditions are optimal.
2. Surplus management
Schemes in surplus must decide how best to preserve or deploy that value. Investment strategy plays a key role, but so does governance. Trustees will need to adopt clearly defined policies on how surplus might be used – whether to enhance member benefits, reduce sponsor contributions, or support long-term funding objectives.
The Pension Schemes Bill 2025 has made this easier by enabling surplus repayment from ongoing schemes, but the decision remains multi-faceted.
3. Investment strategy
Running on requires a shift from leveraged liability driven investment (LDI) to diversified, income-generating portfolios that can meet pension payments reliably. Decisions need to be made.
Trustees must weigh a wide range of factors before deciding whether to postpone buyout
Trustees must assess whether the scheme can generate returns above gilts without taking undue risk, and whether the portfolio is resilient enough to support a multi-year run-on plan.
Real assets, private credit, and long-dated bonds may all play a role, depending on the scheme’s maturity and liquidity needs.
4. Actuarial assumptions
Many schemes still operate with conservative actuarial assumptions, particularly around mortality and discount rates. In a run-on context, there may be scope to revisit these assumptions and reflect a more realistic funding position.
This can unlock value but also requires careful engagement with advisers and sponsors to ensure alignment with long-term objectives and regulatory expectations.
5. Governance and operational capacity
Governance plays a pivotal role in the decision to run-on a scheme. Trustees must consider whether they have the bandwidth, expertise, and infrastructure to manage a more “active” strategy.
This includes access to investment, actuarial, and legal advice, as well as the ability to monitor risks and adapt as the scheme evolves. For some schemes, especially those with organisational memories of some challenging deficit years, the decision is one step too many.
Investment implications of purposeful run-on
Running on requires a shift in portfolio construction: a move from leveraged LDI to cashflow-matching and diversified portfolios that can reliably meet pension payments.
Key building blocks include:
- Long-dated credit: Offering predictable income and alignment with insurer pricing.
- Private markets: Infrastructure, real estate, and private debt that provide both inflation protection and long-term yield.
- Multi-asset strategies: Balancing growth and liability hedging, reducing reliance on leverage.
These strategies must be designed with governance in mind. The operational burden should be low, with clear reporting, and the flexibility to adapt as the scheme’s journey evolves.
Insurance-owned expertise
While not the focus of this article, it’s worth noting that insurance-owned asset managers bring a unique perspective to run-on strategies. That’s because of their:
- Deep experience managing annuity portfolios.
- Familiarity with buyout pricing mechanics.
- Alignment with regulatory and risk frameworks.
- Operational infrastructure built for liability-aware investing.
These capabilities can be particularly valuable when designing portfolios that hedge buyout pricing or preserve surplus for future flexibility.
Conclusion: A chance to unlock value
For well-funded schemes with strong governance and sponsor support, run-on offers a credible, regulated, and potentially value-enhancing alternative. Recent legislative changes have shone a spotlight on run-on considerations.
Nevertheless, run-on is a journey that requires clarity of purpose, robust investment strategy, and a deep understanding of the actuarial, regulatory, and operational landscape.
