SPP: Is your pension scheme ready for run-on?

Buyout is no longer the automatic destination for UK defined benefit (DB) schemes. A new regulatory landscape is reshaping the strategic choices available to trustees and sponsors.

With the Department for Work and Pensions’ (DWP) consultation on surplus flexibilities recently closed, now seems like a good time to reflect on how pension schemes have begun to rethink their endgame and the implications for investment strategy.

The case for run-on – why now?

For two decades, the default question for DB schemes was simple: how do we get to buyout?

With roughly 90% of schemes now in surplus on a technical provisions basis and aggregate DB surpluses sitting at approximately £160bn on a low dependency basis, trustees and sponsors are facing a different set of priorities. The core issue is no longer just liability management, but whether an insurance buyout remains the best use of generated value.

For many schemes, keeping the scheme open and managing its surplus strategically – commonly known as run-on – has moved from a fringe idea to a mainstream alternative.

The Pension Schemes Act 2026 established a statutory mechanism for surplus release, removing historical legal barriers that prevented schemes from sharing value with sponsors and members. With draft DWP regulations expected to take effect in April 2027, schemes have a clear timeframe to evaluate their position.

Five types of run-on structures

Run-on is not a single, uniform strategy. Five distinct models exist across the market:

• Investment run-on: The foundation for most schemes. The scheme builds surplus above its low dependency target to improve eventual buyout terms or prepare for future extraction. It requires no immediate rule changes or formal surplus policy to begin.
• Employer refund: Builds on investment run-on by returning surplus periodically to the sponsor under the new DWP framework.
• Defined contribution (DC) funding support: Redirects DB surplus to cover employer contributions in a DC section or separate scheme, addressing DC adequacy while avoiding direct cash refund tax complexities.
• Member benefit enhancement: Directs surplus toward discretionary pension increases or direct, authorised lump-sum payments to members above normal minimum pension age.
• Sponsor transfer: A third party assumes sponsorship and manages the scheme commercially. While seen in high-profile deals like Stagecoach, this route faces evolving regulatory oversight.

Choosing and implementing the appropriate structure requires rigorous governance, as portfolio design now directly affects regulatory sign-off.

Under the draft framework, scheme actuaries must certify that a scheme is ‘at least as likely as not’ to remain above its low dependency funding threshold over a three-year horizon. As a result, portfolio volatility, hedging quality, and liquidity architecture become direct inputs into statutory certification.

The legal and regulatory framework

The window before April 2027 gives trustee boards the necessary time to review scheme rules, model investment requirements, and establish clear surplus policies before formal extraction mechanisms go live.

There are also areas of the regulations that the SPP believes could be refined to better support and facilitate the models above. This includes making the regulations less burdensome for schemes intending to operate on a long-term run-on basis, building greater flexibility into the payment process and ensuring alignment between DWP regulations and tax legislation for segregated schemes.

While the new legal framework creates an opportunity to rethink the long-term strategy of the scheme, there are still a number of obligations that need to be discharged:

• Scheme rules: Many schemes will still need to amend their rules to accommodate surplus extraction.
• Fiduciary duty for trustees to act in the best financial interests of members remains fully intact
• The history of surplus matters. Where historical decisions favoured the employers’ interests, the moral and legal case for surplus payments to the employer may need particular consideration.
• The moral hazard regime remains. The Pensions Regulator retains its Contribution Notice and Financial Support Direction powers in full.

The endgame decision: Is your scheme ready?

DB run-on is emerging not simply as a mechanism for extracting cash from pension schemes, but as a governed surplus-sharing framework that could deliver better outcomes for members, sponsors, and the broader economy than an immediate insurance buyout.

The question for trustees and sponsors is not whether run-on is possible. It is whether they have the governance, investment strategy and commercial alignment to do it well.

Guy Bottomley is a member of the Society of Pension Professionals.