Pension run-on strategies are gaining traction among UK defined benefit (DB) schemes as regulatory changes make surplus extraction more accessible. Under the traditional buy-out route, surplus transfers to the insurer as part of the transaction. Regulatory shifts now allow extracted surplus to return to members, sponsors, or both. Ortec Finance estimates that approximately £260 billion currently sits as surplus within UK DB schemes, making the stakes substantial.
Ortec Finance, a Risk.net Markets Technology Award winner for ALM in 2026, recently explored how trustees and sponsors should manage a pension run-on in practice. On the surface, daily scheme management may appear largely unchanged. Assets remain with the scheme, and benefit payments continue as they fall due. However, several critical elements demand careful evaluation before committing to this path.
Pension Run-On Requires a Robust Surplus Framework
As surplus extraction becomes a more realistic outcome, Ortec Finance stresses that schemes need a thoroughly stress-tested framework. Decision-makers must understand both the upside potential and the downside risks before extracting any surplus. Unlike a buy-in or buy-out arrangement, investment risk, longevity risk, and governance risk remain with trustees and sponsors during a pension run-on. Ongoing monitoring and proactive risk mitigation are essential.
UK regulation is moving to support this shift. The Pension Schemes Bill 2025/26 introduces provisions allowing trustees to modify scheme rules for returning surplus to employers. In April 2024, the employer refund tax charge dropped from 35% to 25%. Direct lump-sum payments to members from surplus are expected through the Finance Bill 2026-27. These changes are unlikely to take full effect before late 2027, giving schemes time to design their frameworks now. For trustees navigating the intersection of technology-driven automation and regulatory complexity, the planning window between now and 2027 is critical. Stochastic modelling tools and ALM platforms from providers like Ortec Finance can stress-test surplus extraction assumptions across hundreds of economic scenarios before any capital leaves the scheme.
Extraction Triggers and Rates Shape Outcomes
Ortec Finance details several components that any surplus extraction framework should address. First, trustees need to set a trigger level. A specific liability-based funding level, such as 110% on a low-dependency basis, typically activates extraction. To guard against market volatility, an additional prudential measure may require the average funding level to exceed this threshold over the preceding 12 months.
Second, the extraction rate determines how much surplus can leave the scheme. Some frameworks simply extract everything above the trigger point. Others use a staggered approach. Extracting 50% of excess surplus in year one and 60% in year two preserves a safety buffer against potential downturns.
Recovery contributions represent the third component. These act as a protective mechanism when funding deteriorates and cash flow gaps emerge. Conditional top-up rules tied to a specific funding position at a chosen date protect member benefits from a widening deficit. If the funding ratio dips below 100%, a lump-sum contribution restores it to the 100% mark.
Surplus Sharing Between Sponsors and Members
Distribution of surplus is the fourth key element. Sponsors may retain all generated surplus, or share a portion with scheme members. Sharing can take the form of discretionary indexation increases above the guaranteed rate. Direct payments offer another route. According to the Pension Schemes Bill consultation response makes clear that the government expects members to benefit alongside employers, though the exact split remains scheme-specific.
This flexibility makes a run-on strategy attractive for sponsors who want to access trapped surplus while maintaining positive member relationships. Balanced surplus sharing reduces the risk of member challenge or regulatory scrutiny. With £160 billion in surplus calculated on a low-dependency basis currently locked within DB schemes, the financial incentive for sponsors to design equitable sharing frameworks is substantial. Transparent distribution rules build stronger trust with all stakeholders, including the Pensions Regulator, which is expected to issue guidance as the legislative framework matures.
Investment Flexibility During a Pension Run-On
One notable advantage of this approach is investment strategy flexibility. During a pension run-on, schemes can allocate capital to illiquid asset classes unavailable in a buy-out context. Risk modelling should determine the liquidity required for future benefit cash flows. Cashflow-driven investment strategies remain a strong option for mature schemes with predictable payout patterns.
Their whitepaper on DB endgame strategies uses stochastic scenarios to project various investment approaches over a decade. The hypothetical scheme studied carries 105% funding on a low-dependency basis of gilts plus 0.5% per annum, with £3 billion in liabilities. Surplus extraction triggers at 110%. Recovery contributions activate below 100%. Cumulative net present value (NPV) of net return serves as the key metric throughout the analysis. NPV measures surplus extracted minus any deficit contributions over the modelling period. This figure gives sponsors a concrete basis for comparing a pension run-on against buy-out or captive insurance alternatives.
According to the three endgame comparison by Ortec Finance, buy-out is no longer automatically the correct answer for every scheme. Circumstances differ based on funding position, sponsor covenant strength, member demographics, and risk appetite. Captive insurance structures offer a middle ground for schemes seeking more security than a pension run-on but more flexibility than a full buy-out.
Governance Demands Intensify Under a Pension Run-On
Operationally, a pension run-on may not change the daily workload dramatically. However, governance requirements intensify. Funding risks that an insurer would otherwise absorb now remain with the scheme. Trustees must monitor investment performance, longevity experience, and regulatory developments continuously. Reviewing surplus extraction triggers periodically as market conditions evolve is equally critical.
DB schemes with strong sponsor covenants and healthy surpluses sit in the best position to pursue this strategy. With regulatory timelines stretching into 2027 for full surplus distribution rules, now is the window for designing frameworks that balance risk with opportunity. Growing overlap between fintech innovation and sustainable finance also creates new tools for trustees. Such platforms help model environmental, social, and governance factors alongside traditional risk metrics, adding another dimension to pension run-on decision-making. Schemes that build their surplus extraction, investment, and governance strategies today will act decisively once the regulatory framework reaches its final form. A well-structured pension run-on offers sponsors and members a path to unlocking value that buy-out would otherwise eliminate.