In this session, I'm going to focus on a question that is becoming increasingly relevant for well-funded defined benefit schemes.
If a scheme does decide to run on and release surplus, what does it actually need to do differently?
In our work with trustees and sponsors, the conversation is changing. It is no longer about reaching a particular funding level or getting sufficiently close to insurer pricing. Trustees and sponsors are increasingly asking what run on is intended to achieve, whether surplus should be generated and shared, and whether their existing investment and governance arrangements are equipped for that objective.
These are practical questions. They involve decisions on investment strategy, funding framework on covenant, liquidity, cash flows, and importantly, how all of those elements are going to work together. The current funding environment creates a genuine opportunity to improve outcomes for members and sponsors. But financial strength on its own does not create those outcomes. It needs to be converted into a clear purpose, a resilient portfolio, and a governance model capable of achieving strategy over time.
Our central message today is simple, run on is not just a different destination, it's a different way of operating the scheme.
Before we dig into this in more detail, it's worth stepping back and looking at how radically the DB landscape has changed.
For much of the last two decades, the strategic direction for defined benefit schemes was relatively clear. First, repair the deficit, then secure the endgame. In many cases, that endgame was assumed to mean buyout.
Today, a significant proportion of schemes are in a very different position. The pensions regulator estimates that around eighty percent are estimated to be in surplus on a low dependency basis and around sixty percent on a buyout basis.
The challenge has therefore changed from managing a deficit to deciding how financial strength should be used.
That does not automatically mean more risk-taking, and it does not mean that buyout is no longer relevant. A scheme can adopt run on as its current long-term strategy while retaining buyout as a future option.
The more useful question is not, must we choose run on or buyout forever? It is, what value could retaining the scheme create, for whom and over what period?
That value might include stronger member security, discretionary improvements for members, value for the sponsor, or simply the flexibility to choose between several future endgames.
But staying still is not the same as choosing to run on. A positive run-on strategy needs a clear goal, an agreed risk budget, and explicit surplus ambitions. Without those, run on risks becoming the deferral of a decision rather than a deliberate strategy.
Once run on becomes a positive strategic choice, the way the scheme operates also needs to change.
This slide captures the fundamental change. In a traditional endgame journey, the primary aim is usually to reach insurer pricing. The portfolio is managed through asset allocation and sequential de-risking. Decisions are often taken through periodic reviews, and success is measured through transaction readiness.
Under run on, the objective is broader. The scheme must pay pensions, maintain member security, and potentially create a sustainable surplus. That changes the portfolio lens from asset allocation alone to cash flows, collateral, liquidity, and risk management across the whole scheme.
It also changes the frequency of decision-making. Quarterly reporting and periodic strategic reviews may not be sufficient if decisions about collateral, rebalancing, or surplus affordability need to be taken more quickly.
Finally, success is different. Success might mean that benefits are paid with a high level of confidence. Value is created and distributed over time, and future options are preserved.
A key decision is how much that optionality should shape a portfolio. Should it remain continuously transaction-ready, or should it be optimized for run on with buyout or other endgame options considered at defined checkpoints?
That leads to the four questions that sit at the heart of our practical framework.
These four questions are, question one, purpose. Why are we running on and whose outcomes are we seeking to improve?
Second, surplus. What is the level and pattern of surplus distributions that we are trying to support?
Third, the portfolio. How should the assets be designed to pay pensions, protect the funding level floor, and generate the required surplus?
And finally, governance. Do the trustees and sponsors have the information, authority, and implementation model needed to deliver the strategy?
The order matters. We should not start with an asset allocation and ask what it might deliver. We should start with the purpose, translate that into surplus ambitions, and then design the portfolio and governance model around those ambitions.
So the first and most important question is: What is the scheme trying to achieve with run on?
Run on is not a single objective. For one scheme, the overriding priority may be maximum certainty for members. For another, it may include improving member outcomes, returning value to the sponsor, or preserving the flexibility to move to buyout later.
These aims are not necessarily incompatible, but they do create different priorities.
For example, how much certainty is required before the surplus can be released? Should members participate in that surplus? What value does the sponsor expect and over what period? And which future endgame options must remain open?
That is why the same asset allocation is unlikely to suit every definition of its success.
A scheme seeking an early predictable distribution might need greater liquidity and lower variability. A scheme willing to defer distributions may have more capacity to invest for long-term surplus growth. A scheme wishing to remain continuously buyout ready may make different choices from one that intends to run on to maturity.
Trustees and sponsors do not necessarily need to agree a fixed date at the outset, but they should agree the purpose, the conditions under which run on will continue, and the checkpoints at which the strategy will be reconsidered.
Crucially, member security remains the foundation. Run on broadens what can be achieved above that foundation. It does not replace the obligation to pay promised benefits.
Once the purpose is clear, the next decision is how surplus should be accessed over time.
This slide illustrates three broad approaches, each with a different balance between speed, certainty, and long-term value.
At the top is immediate release. This gives the quickest access to surplus and the greatest certainty over the initial payment. But it also removes capital from the scheme at the outset. That leaves a smaller buffer to absorb future volatility and less capital available to generate further surplus. The remaining portfolio is therefore likely to be concentrated in cash, gilts, and other high-quality resilient assets to protect the buffer you have relative to the funding level floor.
At the other end is flexible release. Here, more surplus remains invested for longer. This creates greater potential to generate additional value, but the timing and amount of future distributions are less certain. As the funding position strengthens, surplus can be released periodically, reducing the funding level back towards the agreed buffer.
Between the two is phased release. This provides a more regular distribution pattern while retaining more capital within the scheme compared to an immediate payment. The expected distributions may be supported by contractual asset clash cash flows, but the amounts released should still respond to the scheme's actual experience.
The chart on the right shows a practical effect. Immediate release takes the scheme directly towards the agreed release threshold, which here is set at a hundred and five percent, leaving limited room for adverse experience between a hundred and five percent and the funding floor of a hundred percent.
Phased release maintains a larger working buffer with smaller and more regular distributions. Flexible release allows the buffer to grow further before larger release amounts are considered.
In practice, these are not rigid categories. A scheme could combine them, for example, making an initial payment, moving to a phased schedule, and retaining discretion to pause or increase future distributions.
The right approach will be dependent on the purpose of run on, the strength and visibility of the covenant, the resilience of the portfolio, liquidity requirements, and how much certainty the trustees and sponsor need.
The important point is that the surplus policy and the investment strategy cannot be designed separately. The desired pace and certainty of distributions directly affects how much liquidity, contractual income, and growth exposure the portfolio needs.
Once the preferred distribution model is understood, we can design the portfolio around it, protecting the funding floor, meeting the required cash flows, and using additional risks to the extent the scheme can afford to.
A run-on portfolio has more than one job. It must pay pensions, hedge interest rate risk and inflation risk, maintain collateral resilience, avoid forced selling, generate sufficient return, and retain flexibility if the end game changes.
Those objectives need to be considered together at a total scheme level.
On the left of this slide is the contractual core. This is intended to deliver the funding floor with a high level of confidence. LDI is used to hedge the interest rate and inflation risks and support collateral management. Maturing credit and asset-backed securities can help meet benefit payment and surplus cash flows, reducing reliance on selling assets in difficult markets. And secured and contractual finance can lock in additional return with less dependence on broad capital market forecasts.
This core crucially buys the scheme time.
On the right is affordable growth. The important word is affordable. Growth exposure needs to be sized against the funding underpin and the scheme's capacity to absorb loss. It should draw on a diversified sources of return, be aware of downside risk, and use illiquidity only where the scheme can genuinely afford it and where the expected return from private assets justifies the fees, illiquidity, and complexity.
The starting point should not be, what return do we want? It should be, what can we secure through contractual assets? What risks remain? And how much additional risk can the scheme afford without threatening member security or future distributions?
This produces a portfolio in which every asset has a role. Some assets pay pensions, some provide collateral, some secure contractual return, some generate upside.
That alignment of objectives should also flow through to the way portfolios are managed. And here at Insight, that is exactly what we do.
Where schemes have engaged us in this manner, our portfolio managers are no longer managing to a market benchmark. They collectively manage portfolios to the trustees' objective of paying pensions, distributing surplus, and protecting the funding floor.
A multipurpose portfolio like this also places new demands on governance.
The central governance question is whether trustees can make timely, independent, and well-evidenced decisions while maintaining member security.
We see six components. First, purpose and policy. Trustees and sponsor need a shared understanding of what run-on is expected to achieve and a clear policy for surplus.
Second, decision rights. The trustees and rules need to be understood, and it must be clear which decisions sit with the trustees, the sponsor, advisors, and delegated managers.
Third, capability and structure. Does the board have the expertise and bandwidth required to oversee run-on, and is there sufficient independent challenge?
Fourth, information and advice. Trustees need a timely view of the assets, liabilities, covenant, cash flows, collateral, and risk across the whole scheme. A set of individual quarterly reports may fail to provide a sufficiently comprehensive overall picture.
Fifth, controls and contingency. The framework should define what happens after a release if funding deteriorates, liquidity becomes constrained, or the covenant weakens.
Finally, assurance and accountability. Material decisions should be supported by robust analysis and a clear record of why the decision was taken.
Delegation can help, but it should be deliberate. Trustees and sponsors should retain the important strategic decisions around purpose, security, the funding floor, the surplus policy, and material changes in direction. Implementation decisions can sit closer to the information and expertise needed to act within agreed parameters.
For our fiduciary and OCIO clients that have delegated to Insight, they have often moved to a model where more is delegated for different reasons. The most common reasons we hear is that the current governance approach often had gaps in pulling together the complete picture or gaps in the speed of implementation, and the realization that for run-on, the most effective governance model sees the scheme as one interconnected balance sheet.
This diagram brings all of that together. Assets, liabilities, liquidity, and covenant are not separate subjects.
Liabilities determine the cash flows the scheme must meet and shape the hedge. Liquidity enables a scheme to pay benefits, meet collateral calls, and take advantage of opportunities without being a forced seller. Investment outcomes affect funding and surplus. The covenant determines how much downside risk and illiquidity the scheme can reasonably support.
A decision in one area therefore changes the risks and opportunities in others. For example, a stronger and more durable covenant might support greater flexibility in the buffer or risk budget. Conversely, a weakening covenant may require distributions to pause, risks to reduce, or an alternative endgame to be considered.
This is where fragmentation can create blind spots. Individual mandates can each be managed well, while the total portfolio remains suboptimal. Different managers may create overlapping exposures. Liquidity may exist in one portfolio, but not accessible in another where it is needed. Reporting may arrive at different times, and no single party is accountable for the overall position.
Integration does not necessarily require every asset to be managed by the same organization, but somebody needs responsibility for assembling the whole picture, monitoring it quickly enough to be useful, and ensuring that implementation remains aligned with the trustees' objective.
Risk is ultimately experienced at a scheme level, not at a mandate level.
The final slides show what this can look like when the framework is translated into an actual portfolio and cash flow plan.
This illustrative case study from one of our clients brings the framework to life.
This is a client which has a healthy funding position, and they are gradually looking to release surplus. The objective is to support annual surplus release of 20 million while meeting the scheme's benefit cash flows and protecting the funding underpin, which is 100% funding on gilts flat.
Looking at the asset allocation on the right, the portfolio combines a 95% interest and inflation hedge with collateral resilience to withstand a 3.5% rise in interest rates.
The asset allocation is diversified, but each component has a defined role. The LDI provides the liability hedge. Buy and maintain credit, secured finance, private debt, and asset-backed securities create contractual and maturing cash flows.
A measured allocation to multi-asset credit, insurance-linked securities, and protected equities provides additional return potential.
Looking at the cash flow profile, member benefit cash flows, including the 20 million per annum surplus ambition, is shown in the black line. The individual bars show when cash is expected to become available, how that cash supports the liability profile, including the drawdown into private debt mandates.
This illustrates how the scheme will pay cash flows and can avoid being a forced seller of assets at the wrong time.
The 10-year point here is simply a marker and a reassessment period for this particular client, which is why we see this bullet at 10 years.
Equally as important as the liquidity view is understanding what your outcomes will be and what might throw you off course.
On this next slide, we show where we expect the client to be in 10 years' time.
The chart is simply illustrating that taking into account what they have today on the left-hand side in their current assets, once we allow for contractual returns that have already been secured, the expected return on the growth assets and the payments that they are going to make, including their surplus release, they're expected to remain above their funding floor of 100% in 2036.
We also test this strategy against defaults, future reinvestment spreads, lower expected returns from the growth assets, and forced selling risk.
This is important because a surplus framework should not be judged only by the central expectation. It should also be judged by whether the distributions remain affordable under credible adverse conditions.
The practical lesson that we want to leave you with is that run-on can be made tangible.
The purpose can be translated into a cash flow requirement, a resilience standard, a portfolio structure, and a set of distribution rules that can be monitored over time.
So the framework is straightforward. Agree the purpose, define the surplus ambition, build the portfolio around the required account outcomes, and put in place governance that can see and manage the whole scheme in a timely manner.
Run-on is not a passive decision to wait. Done properly, it is an active strategy for using financial strength productively while keeping member security at its core.
