Lindsay Nickerson, the new chair of the DC Investment Forum, explores the interaction between defined benefit surpluses and payments into defined contribution pension schemes.
The beginning of the end for defined benefit (DB) pensions, or the end of the beginning?
For years, buy-ins and buyouts have been the gold standard for DB schemes. The approach has been simple: remove risk, lock in benefits, transfer liabilities and close the chapter.
Yet as funding levels have improved markedly across the market, has this become too narrow a frame?
The endgame debate is often seen as binary. Schemes are either on an inexorable path toward buyout at the earliest affordable opportunity, or they are portrayed as lingering in run-on mode and therefore retaining avoidable risk.
But this framing understates how much the landscape has changed. Many schemes are now fully funded, and a growing number sit in surplus on low-dependency measures. That improvement creates genuine strategic choice.
Seeing the whole picture
Buyout pricing reflects insurer capital requirements, profit margins, and conservative investment assumptions. In numerous cases, the premium required to secure benefits through insurance exceeds the economic cost of delivering those same benefits within a prudently managed scheme that continues to run on.
A buyout crystallises security, but it also narrows optionality. Once assets move onto insurer balance sheets, they are managed under a different regulatory regime with distinct capital constraints.
For schemes with weak governance, limited sponsor covenant, or low appetite for ongoing oversight, that trade-off may be entirely appropriate.
However, where funding is strong, sponsors are credible, and trustees are capable, an immediate buyout is not the only defensible fiduciary route.
Run-on, if properly structured, is not about stretching for returns or gambling with member security. It is about maintaining a low-risk funding position while retaining the capacity to earn a modest, diversified return premium over time.
A practical bridge between DB and DC
But what if run-on could do more than simply preserve capital within the pensions system? What if it could directly improve outcomes for defined contribution (DC) members within the same organisation?
Most corporate pension arrangements now comprise a closed DB scheme and an active DC section. Typically, these operate entirely separately, with different governance arrangements, different investment structures, and different scale.
Yet DC sections often suffer from precisely what DB schemes have in abundance: scale, governance capability, and access to a broader investment opportunity set.
For well-funded DB schemes in run-on, there may be a more direct route to strengthening DC outcomes: pooling growth assets across both sections under a single investment structure.
This isn’t about cross-subsidy or blurring liabilities. It’s about recognising that if a DB scheme is genuinely secure and holding growth assets as part of a balanced run-on strategy, those assets could be managed alongside DC growth allocations within a unified pool.
The case for pooling
The benefits are tangible. DC members gain access to institutional scale they would never achieve independently. A £200m DC section investing alongside a £500m DB scheme suddenly has access to illiquid assets, infrastructure, private equity, and negotiating power on fees that would otherwise be out of reach.
For the DB scheme, the economics also improve. Managing growth assets at a greater scale reduces costs and enhances efficiency. If the scheme is already holding equities, diversified growth funds, or alternatives as part of its run-on strategy, doing so within a larger pool makes practical sense.
Governance becomes more efficient, too. Rather than duplicating investment committees, manager selection processes, and monitoring frameworks, trustees oversee a single, professionally managed growth portfolio serving both member groups.
This approach requires careful structuring. Trustees would need to ensure that neither DB nor DC members are disadvantaged, that conflicts of interest are managed, and that the regulatory framework supports the arrangement.
Some master trusts already operate with both DB and DC sections under unified governance. The question is whether standalone schemes can adopt similar principles without requiring full master trust infrastructure.
It’s not suitable for every scheme. But for well-funded DB arrangements with active DC sections and capable governance, it offers a practical mechanism to translate DB capital strength into measurable benefits for DC members.
A deliberate choice
Ultimately, DB endgame should not be judged solely by the speed with which risk is taken off the table. Where schemes are demonstrably secure, run-on can serve a broader purpose, not through vague references to system-wide capital preservation, but through direct, structural improvements to DC outcomes within the same organisation.
Properly governed, this isn’t a delay tactic. It’s a deliberate strategic choice about how accumulated DB capital can be deployed to strengthen retirement provision for the workforce that replaced it.
Lindsay Nickerson is chair of the DC Investment Forum.
