In recent years, many trustees and sponsors have turned their attention towards the preferred long-term strategy for their scheme – especially as funding levels have improved with many now being able to buyout without needing additional funding. The dawn of the new funding regime has also promoted further focus on this.
Whilst alternative endgame solutions, like captives and superfunds, are suitable for some, most are considering the trade-off between a “run-on” and a “buyout” strategy. Stakeholders are consciously evaluating the opportunities, costs and risks in determining the strategy they believe is best for their scheme. For some, reaching buyout as soon as affordable remains the focus, but for others where meaningful value is at stake, running on has gained in popularity despite the prospect of buying out becoming a more realistic ambition.
In 2025, we expect many more schemes to dive deeper into these strategic reviews – and with this in mind, we set out five top tips to help trustees and sponsors navigate through the process.
01
You may already have a strategy that is dead-set on buying out and that may be for good reason. For example, where there are serious concerns over covenant which make it unsuitable for a run-on strategy or the scheme is too small to continue to be run efficiently or to generate sufficient additional value to benefit from wider opportunities. There may also be considerations around the sponsor’s long-term corporate strategy that led to a clearly preferred solution and accounting implications might materially influence views too. However, unless the strategy is obvious or irrevocable decisions have been made, it would be worth double checking the strategic status quo to avoid any later regret – doing so need not be onerous.
02
A possible objective for run-on strategies is to generate surpluses that could be used for the benefit of one or more of the stakeholders – for example, paying scheme expenses, funding DB accrual or DC contributions, providing members with benefit improvements (e.g. through discretionary increases) or simply having larger surplus to distribute at the point of a future wind-up.
To understand the relevance and scope of these opportunities fundamentally depends on a scheme’s trust deed and rules, such as: who triggers wind-up? how is surplus distributed on wind-up? who has the power to grant discretionary increases or augment benefits? This is a key first step in understanding the context in which the scheme is operating, which opportunities are relevant for each party and can be instructive over how any negotiation might be approached.
It is also really helpful to consider the potential size of surplus that might arise, whether the numbers are meaningful enough to benefit stakeholders and the accompanying downside risks (such as the chance of contributions being required). This needn’t be a burdensome activity and a simple projection of how the surplus might develop and be used over time can illuminate whether the run-on opportunity is considered worthwhile.
03
The decision to run on is not an indefinite one – we expect most schemes to undertake a buyout at some point, such as when the scheme becomes sub-scale and inefficient to continue to run-on. This could be a very long time in the future (e.g. many decades away) but for others this could be much sooner. Necessity defines the far end of the spectrum, and many others may find they have the inclination to buyout sooner – perhaps after the potential for surplus generation and the additional delivery of value has passed its peak or because circumstances change (e.g. covenant) and there is then a desire to pivot towards the full transfer of risk.
Being clear on why you are running on – the purpose, and hence the potential timescales – is key to designing and implementing a robust framework to deliver on that purpose. These two issues will dictate many fundamental aspects of the strategy including the make-up of the asset portfolio and its resilience, which drives the expected returns, and, for example, whether there is a case for hedging longevity risk. They also help inform the nature of additional protections or adequacy tests or other mechanics to govern surplus distribution.
Without this clarity, evaluating the benefits of one strategy versus another can seem arbitrary.
04
Ensuring run-on will deliver to your purpose successfully is crucial – otherwise it could undermine the basis for the whole decision. Key considerations here could, amongst other things, include:
As such, if run-on is pursued, trustees and sponsors should consider their appetite and their resources to make it work – that doesn’t mean run-on is complicated, just that stakeholders will need to be prepared to “think differently”.
05
Endgame strategy decisions are inherently scheme-specific – what works for one scheme isn’t necessarily the right approach for another. The opportunity, funding position, rules, historical context and covenant will vary from scheme to scheme. It is important that trustees and sponsors assess and tailor their situation to fit - the contingency plans built into any framework and its monitoring will need to be bespoke to the scheme and its circumstances.
If the Government moves forward in the areas previously consulted on around earlier and easier access to surplus, either through refunds to the employer in ongoing scenarios or one-off lump sum discretionary benefits for members, then the opportunity set for running on will widen further. However, even absent this, it is still worth trustees and sponsors understanding the merits of plausible alternative endgame strategies for their schemes as soon as possible as some opportunities for use of surplus are likely to exist already. As time marches on, the opportunities available to a scheme can decline and, without the context being understood, stakeholders could come to regret some actions they take.
