Running on: DB schemes extend their investment horizons

Improved funding and lighter regulation are prompting well-funded pension schemes to delay buyout and pursue longer-term allocations to private credit, infrastructure debt and other illiquids

After three years of elevated gilt yields and sharply improved funding positions, UK defined benefit (DB) pension schemes are in stronger shape than at any time in a generation. But rather than rushing to the insurance market, a growing number are choosing to ‘run on’ – continuing to manage assets and pay benefits directly instead of pursuing an immediate buyout.

According to Aon’s 2025 DB Endgames Survey, 28% of schemes now plan to run on beyond the point needed for settlement readiness – up from 17% in 2024 – with roughly half of these intending to do so indefinitely. The trend is most pronounced among schemes with assets above £1 billion, where nearly two-thirds plan to continue operating rather than seek a buyout.

Meanwhile, a Caceis report in October found 85% of surveyed schemes were at least fully funded, and more than three-fifths had funding levels exceeding 110%, suggesting the financial strength to explore alternatives. Government figures in September revealed an aggregate surplus of approximately £223 billion.

In addition to higher gilt yields – which allow future benefits to be more heavily discounted – a reduction in tax on surplus withdrawals in 2024, from 35% to 25%, and revised regulatory guidance are supporting schemes choosing to run on.

Jordan Harrison, partner and head of advisory services at XPS Group, says: “The number of insurance transactions has stayed stable, but total volumes have fallen for the first time in about a decade – possibly ever. That’s because larger schemes and their sponsors are pausing. They’re asking whether they really want to give away a potential surplus to an insurer, or crystallise losses on illiquids. Those conversations are definitely happening now.”

The upcoming Pension Schemes Bill, expected to become law around 2027–28, will give schemes new freedoms. “Clients very close to buyout are going ahead, but everyone else is reassessing,” says Harrison.

He says that many schemes that had planned to sell illiquids in preparation for a future buyout are holding off to see how the legislation and their funding positions evolve. “For well-funded schemes above roughly £100 million, running on often looks more attractive. The downside risk is smaller than the potential upside, especially given the maturity of their liabilities and higher yields on low-risk assets.”

Harrison estimates a well-funded scheme could generate around 2% surplus per year for every pound of liabilities. “On a £1 billion scheme, that’s £20 million a year – achievable with cautious, insurer-style investing.”

Lisa Purdy, a professional trustee at Capital Cranfield, says: “Many schemes have a surplus and the favourable regulatory environment allows companies to use some of it to uplift member benefits, pay into a DC scheme, or potentially return it to the sponsor. You can see why that would be attractive.”

Jonathan Craddock, director at investment manager VLK, says that while buyouts will remain the right path for many, “running on offers a more flexible, potentially higher-value route”.

Schemes that extend their time horizons can pursue more ambitious investment strategies – not only enhancing outcomes but supporting broader goals, such as funding sustainable, productive assets, he says. “Running on isn’t about taking undue risk – it’s about making the most of strong funding positions and robust governance to unlock long-term opportunity.”

Taking time to plan

Running a scheme involves ongoing costs, so the benefits must outweigh the expense. “It may only become worthwhile for schemes around £100 million or more, but it ultimately depends on each scheme’s circumstances and the sponsor’s objectives,” says Purdy. “We’re seeing some companies move DC trusts back into DB schemes or reopen sections to facilitate transfers.”

She suggests that for the majority running on is about postponing a buy-in or buyout, typically over a five- to ten-year timeframe. As fixed costs remain – including administration, actuarial valuations and governance expenses – there’s always a tipping point where the cost of continuation starts to outweigh the benefits.

“There’s no rush to do a buyout when schemes hold illiquid assets or their data isn’t ready,” she says. “Planning properly and running on allows schemes to be more thoughtful.”

Some large schemes, especially those linked to financial services firms, may choose to run on indefinitely. Craddock notes that some investors are now looking up to 20 years ahead. “Running on fundamentally changes the investment time horizon. That opens the door to asset classes that weren’t practical before – particularly private markets, where lock-ups are longer but return premia are available.”

Investing for the long haul

One way to run on is to complete a buy-in for members’ benefits and then separately invest the surplus. “Some companies, particularly in the US, like to continue to operate a scheme with a surplus because it has a positive accounting impact – they can reference the surplus as an asset on their balance sheet,” says Purdy.

Alternatively, a low-risk strategy fully hedged for interest rates, inflation and perhaps longevity can replicate many of the protections of a buy-in. “The first priority is de-risking – then look to use credit or cash-flow-matching assets,” she adds. “You’d still want a buffer for residual risks, but any surplus beyond that could be invested in higher-return assets.”

A scheme with a significant surplus could take a more ambitious stance. “I’ve seen schemes at 180% funded,” says Purdy. “The key is aligning the investment timeframe with the run-on period. Assets could be selected to support cash-flow matching. It’s about designing the whole portfolio to deliver what’s needed.”

She sees private credit or infrastructure debt as the most suitable options: “Asset classes such as venture capital are probably too risky unless it’s a very large scheme committed to running on for the very long term. Private credit or securitised debt are more suitable, as they offer steadier returns and fit better with shorter horizons.”

Harrison adds: “With contractual assets, the returns and timelines are clearer. If you invest in a private debt fund with a six-year maturity, you know roughly when you’ll get your cash flows back, and you’re confident you’ll have your money returned within seven or eight years even with extensions.”

If the run-on model becomes mainstream, Purdy notes that schemes may converge on similar assets: “Globally there’s enough capacity, but with DC schemes and the LGPS also increasing exposure to private markets under the Mansion House reforms, demand is strong. Schemes need to look globally rather than just within the UK to find true diversification and opportunity.”

Craddock observes that run-on schemes are increasingly buyers of illiquids being sold by those heading to buyout. “This creates liquidity and better pricing in secondary markets, benefiting both those exiting and those extending,” he says. “It’s a healthy dynamic that reflects a more mature and diversified DB ecosystem.”

Harrison agrees that the main sellers are UK DB schemes preparing for insurance transactions. “For schemes preparing for insurance, the last thing they want is a tail of private equity funds they can’t get out of. Trustees’ main question when selling is, what discount can I take and still afford to insure?”

Craddock adds that he has helped institutional investors implement diversified mandates. “These include private equity, infrastructure and private debt – asset classes well suited to longer-term strategies. Extending the horizon gives trustees the ability to harvest the liquidity premium that comes with these investments.”

Looking ahead

Another potential structure would be to complete a buyout and then manage any remaining surplus separately. Alastair Greenlees, head of investment strategy at VLK, says: “A successful run-on phase resulting in a meaningful surplus may open a new possibility. Trustees and sponsors could explore innovative options – perhaps transferring residual liabilities to an insurer while leaving a self-managed ‘endowment’ to fund corporate or social objectives.”

However, Purdy suggests this may not suit many scheme sponsors. “A full buyout winds up the scheme, so the surplus would have to be dealt with at that point. If the sponsor wants to continue to run the scheme and extract surplus, a buy-in is more practical because it remains an asset on the balance sheet and gives ongoing flexibility.”

While there are clear attractions to running on, schemes need to remain aware that some risks remain. In particular, schemes need to remain confident in their sponsor covenant. “If the covenant were to weaken, you might need to move quickly to buy-in or buyout. You don’t want to be forced into liquidating assets at the wrong time,” says Purdy.

Harrison notes that downside scenarios are relatively limited. “Maybe single-digit percentages of cases of running on leave schemes worse off. Of course, if there’s no sponsor covenant, insurance is the only safe option. But where the sponsor is strong and willing to cover shortfalls, interest in running on is increasing.”

If the run-on model continues to gain traction, it could subtly reshape the UK’s long-term investment landscape. With policymakers encouraging pension capital to play a greater role in supporting productive investment, run-on schemes could become an important bridge between de-risking and growth. For trustees and sponsors, the message is increasingly clear: the endgame no longer has to mean the end.