Pension scheme run-on – Gimmick or game changer?

On Thursday 13 June at First Actuarial’s 2024 Conference, Vicky Greenwood presented a session on pension scheme run-on. In this article, Vicky explores the prospects of run-on for schemes of all sizes.

I’ve been in the pensions industry for nearly 15 years and for much of that time the focus has been on managing deficits. That all changed with the 2022 mini-Budget. What ensued, from a pensions perspective, can only politely be described as chaos, but in its aftermath a ‘new world’ of scheme surpluses emerged.

That’s great news for those three-quarters1 of schemes expected to have a surplus of one form or another. It does, however, pose a new set of questions for those schemes, but more on that shortly.

For the quarter of schemes that have survived the last 18 months only to find themselves still in deficit, you have my sympathies. A different challenge for you awaits, and that is another article entirely.

What next for schemes that find themselves in surplus?

Latest estimates suggest that there is an aggregate £225bn2 of surplus pension assets when assessed against a ‘low-dependency’ measure of liabilities. That’s a big number whichever way you cut it, so it’s no wonder that the Government has been keen to explore ways in which the assets “held in DB pension schemes can deliver for the wider economy”.

Eager to follow suit, The Pensions Regulator is now encouraging schemes in surplus to reconsider their main options – “buying out or running on”.1 That’s quite a step change given that there was no mention of “run-on” in the Regulator’s 2022 statement.

Now, buy-out is not a new concept. In fact, 2023 was a record year in the buy-out market, with nearly £50bn of premiums written. With around 85%3 of schemes believing buy-out still represents the gold standard of outcomes for members, 2024 is expected to be another bumper year for the risk transfer market. But if we consider that there are some £920bn4 of assets sat in schemes that are estimated to be fully funded on their buy-out measure, it’s clearly going to take some time to shift pensions risk from the funded regime to the insurance sector.

Is the Regulator’s nudge towards run-on in fact more like a push?

Before we can consider whether run-on is more of a necessity than a ‘consideration’, we need to understand what it is and what it isn’t.

What is run-on?

Run-on is a framework that allows economic value to be built up in the first instance, and then extracted from a pension scheme over time, without jeopardising the long-term security of member benefits.

Why run-on rather than buy-out?

The biggest beneficiaries of the current buy-out trend are undoubtedly the insurers.

By deciding to run-on rather than buy-out, schemes can focus on retaining much of the economic value within their scheme, with insurer profit margins being diverted, in part at least, ultimately benefiting both the sponsor and the membership. Our estimates suggest that 10–15% of value can be released cautiously in this way over time, if done correctly.

Importantly, the decision to run-on is not irrevocable, unlike a buy-out. It’s also not incompatible with a longer-term aspiration to buy-out, with many run-on strategies ultimately expected to end up moving to buy-out when economical to do so – in a similar way envisaged by Clara-Pensions and some of the capital-backed journey plan products available.

Which schemes should consider run-on?

In short, I believe every scheme should consider run-on.

Based on our analysis to date, we expect that perpetual run-on is only likely to be right for a minority of schemes – with the scale, security, governance and, potentially access to a Defined Contribution scheme under trust, to make the cogs of run-on work smoothly into the long term.

However, that answer only tells part of the story. It’s unlikely to be economical for all but the largest of schemes to run-on in perpetuity – there comes a point for most schemes where their size and profile of membership make it just as cost-effective to access scale via insurance. That said, a medium-term run-on strategy could have economic (and wider social) benefits for a much broader spectrum of schemes.

It’s on this middle ground that the focus shifts to making the active decision to defer buying-out until it’s economically advantageous to do so. In this scenario, the scheme builds up its reserves while it matures so that when it eventually engages with the market, there is sufficient capacity and competition to make the premiums attractive.

In the meantime, there is a whole world of possibility. Future accruals could be maintained for active members, trustees could shape member discretions, scheme expenses could continue to be met and buffer capital could still be built. This is what we would term ‘running-on as a bridge to buy-out– and it could look quite different to simply waiting until buy-out becomes affordable.

In fact, many schemes (large and small) are already running-on in one form or another. They just haven’t formalised or optimised the framework yet!

What does a run-on framework look like?

Under a properly designed run-on framework, buffers, security mechanisms and controls are all put in place to minimise the risk of failure and carefully control the build-up and extraction of any surplus.

In the case of perpetual run-on, investment strategies will have a high degree of resilience, hedging and cashflow matching. And funding levels should, by design, be relatively stable (and on the up). While the case for an allocation towards return-seeking or higher-yielding assets is supported by the longer time horizon (and arguably the current low levels of credit spreads), downside risks need to be proportionate to the circumstances and appropriately managed. The risk of deficits emerging should be low but will require rapid correction where they occur, and trustees should have a plan B (likely to trigger buy-out) should the scheme lose its way.

As always, there are nuances here. The considerations for fully solvent schemes will differ from those still on the journey. Those bridging the journey to buy-out will have a different perspective from those that are considering sharing any surpluses that emerge over time. Open schemes will have more flexibility than more mature ones. And so on.

Every run-on journey will have different characteristics, but the underlying principles will be similar.

Are there any risks?

Let’s be 100% clear. Run-on is not a risk-free solution. While many investment risks can largely be managed, some will remain – principally in the default, equity and illiquidity spaces – and these will require some thought.

Other risks, such as longevity, legislative, political, governance and expense risks, will remain. The risk versus reward trade-off must therefore be right.

Gimmick, game changer or even necessity?

I’m a romantic. I believe that greater innovation and choice will ultimately lead to better outcomes. But:

  • I’m an actuary – I see risks that need to be properly managed before I see reward. It’s easy to forget that over the last five years alone we’ve experienced a global pandemic, a European food and energy crisis prompted by war, a UK gilt crisis and a cost-of-living crisis, all resulting in severe market volatility.
  • I’m a realist – I know that the resources of both third-party administrators and insurers are constrained. Not every scheme that can afford to strike a deal over the next few years will be able to do so. We could be doing more to support these schemes achieve better outcomes.
  • I’m a mother – I believe in learning from history without letting it constrain either our beliefs or our future. I believe in better pensions for every generation – those who have already earned their right to a comfortable retirement as well as those who simply deserve the right not to worry about an impending retirement crisis.

If done well, and with the right motivations (and political support), I see run-on as a real game changer for schemes both big and small, whether their motivation is to run-on indefinitely or until there is a better, more cost-effective alternative.



1 The Pensions Regulator’s Annual Funding Statement 2024, schemes completing a T19 health check

2 DWP consultation on Options for Defined Benefit schemes Options for Defined Benefit schemes – GOV.UK (

3 83% survey across c250 industry professionals, Vidett Endgame conference

4 Annex to DWP consultation on Options for Defined Benefit schemes

Any questions or comments about this article?

Get in touch with the author, Vicky Greenwood.

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