Significant shifts in the defined benefit (DB) pension schemes landscape mean that as schemes mature, trustees and sponsors now face a broader spectrum of strategic choices. We explain why the choice between buyout and run-on is no longer binary.
Read this article to understand:
- The new backdrop for DB pension schemes
- Why DB pension schemes now have a wider palette of options to choose from
- The case for purposeful run-on
The DB pension schemes landscape is undergoing a profound transformation. Many DB pension schemes now find themselves in a position that would have been virtually unthinkable a decade ago: they’re in surplus. This follows the gilt market dislocation seen in the wake of September 2022’s UK mini-budget and the subsequent recovery.
According to data from XPS Group, UK DB pension schemes maintained a record aggregate surplus of around £222 billion in September 2025, reflecting strong funding positions and a 124 per cent funding level relative to long-term liabilities.1
The Pension Protection Fund, which protects DB pension scheme members if the employer funding their pension becomes insolvent, also reported a £14.1 billion surplus and announced that it would not charge a levy to schemes in 2025/26, easing costs for schemes and sponsors.
This continued strength, supported by effective hedging strategies and higher gilt yields, offers schemes new strategic opportunities and has prompted trustees and sponsors to re-evaluate their endgame strategies.
The historical context
For years, buyout has been considered the gold standard for DB pension schemes. It offered conclusiveness: liabilities transferred to an insurer, the scheme wound up, and the risks crystallised. Trustees could sleep easier knowing members were protected under the Financial Services Compensation Scheme, and sponsors could remove pension obligations from their balance sheets once and for all.
However, the landscape has changed. The Pension Schemes Bill 2025 and accompanying surplus extraction legislation have introduced new flexibilities. Trustees now have regulatory support to explore alternative models that preserve member security while unlocking strategic value from surplus assets.2
Why alternative pathways are gaining traction
Several factors are driving the shift away from buyout as the default endgame:
Market capacity constraints
While the buyout market has seen a modest expansion in provider capacity, there remains a natural ceiling on the volume of risk that can be underwritten annually. This is shaped not only by operational bandwidth but also by structural limitations such as the availability of reinsurance. As more schemes approach full funding and seek to transact, these constraints may create bottlenecks.
There remains a natural ceiling on the volume of risk that can be underwritten annually
Shifting sponsor appetite
Some sponsors are reluctant to pay the premium associated with buyout, especially when surplus could be used to support broader corporate and/or member objectives.
Illiquid assets
Schemes with significant holdings in private markets or real assets face practical barriers to buyout, which typically requires full liquidity.
Surplus utilisation
Trustees and sponsors are exploring ways to share surplus with members. This could be through discretionary increases to member benefits, top-ups to contributions, or through reinvesting in ways that encourage long-term growth aligned with net zero goals.
A range of options
As defined benefit schemes mature, trustees and sponsors face a wider spectrum of choices beyond the traditional binary of running on or buying out. These include:
Insurance transactions
Risk transfer to an insurer, either partially through a buy-in or fully via buyout. Buy-ins are often used as a phased approach, allowing schemes to lock in pricing and de-risk incrementally.
Trustees and sponsors face a wider spectrum of choices beyond the traditional binary of running on or buying out
Purposeful run-on
Continued operation of the scheme with a focus on surplus management, member outcomes, and strategic investment. This approach can offer flexibility and value retention, particularly where the prospect of buyout is not immediately optimal.
Superfunds
Consolidation vehicles designed for schemes unable to afford buyout, offering a regulated alternative with capital buffers and governance oversight.
Capital-backed journey plans
Structures where third-party capital supports the investment journey, providing downside protection and sharing in upside potential. These can be particularly attractive for schemes seeking to manage longevity and market risks while retaining control.
Decision matrix
To help trustees and sponsors navigate this decision, the matrix in Figure 1 outlines key factors influencing the suitability of buyout versus run-on.
Figure 1: Buyout versus purposeful run-on
| Factor | Favours buyout | Favours run-on |
|---|---|---|
| Sponsor financial strength | Low | High |
| Scheme surplus | Low | High |
| Illiquid asset exposure | Low | High |
| Trustee risk appetite | Low | High |
| Governance capability | Basic | Advanced |
| Desire to share surplus | No | Yes |
Source: Aviva Investors, November 2025.
This matrix is intended as a guide, not a rulebook. There will be nuance and each scheme must assess its unique circumstances, including covenant strength, member demographics, and investment strategy.
The strategic case for purposeful run-on
Purposeful run-on is not about delaying the inevitable. It offers a proactive strategy that seeks to optimise member outcomes, align with sponsor objectives and unlock long-term investment potential.
Purposeful run-on offers a proactive strategy that seeks to optimise member outcomes
Schemes can combine an approach that is risk-aware and capital-efficient, while retaining the flexibility and member-centricity integral to pension schemes.
One of the key attractions with this approach is the potential to achieve a reasonable expected return over gilts simply by unwinding prudence in actuarial assumptions.
When a scheme decides to run-on, it may relax some of these assumptions, especially if it’s well-funded and has a long-term investment horizon.
This “unwinding” can:
- Reduce the size of the estimated liabilities.
- Allow for a higher allocation to growth assets.
- Improve expected returns relative to gilts.
Opportunity cost considerations
When schemes transact a bulk purchase annuity (BPA), the insurer assumes the investment risk and manages the assets accordingly.
Conservative estimates imply that the opportunity cost over a 10-year horizon could be meaningful
Some market observers have suggested that, depending on the insurer’s investment strategy and pricing assumptions, the scheme may miss out on significant return potential over time as a result.
While precise figures are difficult to generalise – given the bespoke nature of each transaction and the variability across BPA providers – even conservative estimates imply that the opportunity cost over a 10-year horizon could be meaningful.
For some schemes, this may represent a trade-off between certainty and the potential to enhance member benefits or reduce sponsor contributions through continued investment.
Regulatory tailwinds
The June 2025 pension reforms have created a supportive regulatory environment for run-on strategies.
Surplus is no longer a liability; it’s potentially a strategic asset
The Pensions Regulator (TPR) has explicitly endorsed surplus release under member-protective conditions, recognising that well-funded schemes should have the flexibility to deploy surplus capital in ways that benefit both members and sponsors.
This marks a significant shift in tone. Surplus is no longer a liability; it’s potentially a strategic asset.
TPR’s guidance encourages schemes to explore innovative models, including discretionary benefit enhancements and sponsor reallocation under appropriate safeguards.
Conclusion: A chance to redefine legacies
The decision between buyout and run-on has become more nuanced. Trustees must weigh a range of financial, strategic, and governance considerations – including the interests of wider sponsor stakeholders such as shareholders. For well-funded schemes with strong sponsor support and a desire to retain control, purposeful run-on is emerging as a credible and increasingly viable alternative.
For well-funded schemes, purposeful run-on is emerging as a credible and increasingly viable alternative
Still, the improved funding picture doesn’t erase the memory of more challenging times. Many schemes carry the legacy of deficit years, when funding levels were fragile, sponsor contributions were stretched, and investment decisions were shaped by short-term solvency pressures. The instinct to de-risk and lock in certainty remains deeply embedded for some and understandably continues to influence decision-making.
As the DB pension scheme landscape evolves, schemes have an opportunity to redefine their legacy – not just as providers of guaranteed income, but as stewards of long-term value. Purposeful run-on invites trustees to consider a broader set of outcomes: preserving surplus, enhancing member benefits, and maintaining strategic flexibility in a way that reflects the scheme’s maturity, governance strength, and long-term purpose.
