Why run-on is changing pension endgame thinking

Key takeaways

• Run-on should be measured by net value, not surplus alone.

• Investment strategy should reflect the purpose of surplus, not simply target higher returns.

• Strong governance and implementation are essential to successful run-on strategies.

Run-on has become one of the most actively discussed topics in the UK defined benefit pensions market. Improving funding levels, combined with recent regulatory developments around surplus extraction and the government's consultation on run-on, have expanded the scope of schemes that might look to adopt the endgame option.

Yet, the challenge in pursuing run-on is that it often requires a re-thinking of a scheme’s objectives. Success depends on more than funding levels or expected investment returns, but by whether a scheme can generate sustainable value after allowing for governance, implementation and operating costs.

One of the biggest misconceptions surrounding run-on is that any surplus generated represents additional value. In reality, schemes first need to recover the ongoing costs of remaining in operation. Governance, administration, actuarial advice, investment implementation and the eventual distribution of surplus all affect the economics of a run-on strategy.

Industry discussions commonly place non-investment operating costs at around £150,000-£200,000 per year, before investment-related expenses are considered. That means the objective is not only generating surplus, but generating meaningful net value after all costs have been met.

This also has implications for scheme size. While run-on has traditionally been viewed as an option for schemes above £500 million, analysis suggests the economics may become viable from around £80-100 million, assuming efficient governance and approximately 0.5% annual excess return above a low-dependency funding basis. The implication is that efficiency may matter as much as scale.

Run-on should not simply be viewed as taking more investment risk. Investment strategy should focus on the intended purpose of surplus.

Whether surplus is expected to support discretionary benefit improvements, be shared with the sponsoring employer, or preserve flexibility before a future buyout should shape portfolio construction from the outset.

This naturally encourages a more outcome-focused investment approach. Core assets continue to support liability security, while return-seeking assets are designed around the scheme's long-term objectives rather than a generic return target.

Maintaining flexibility is also important. Schemes need investment strategies capable of adapting if market conditions, funding levels or sponsor covenant change, allowing trustees to retain the option of pursuing alternative endgame strategies if circumstances evolve. 

Running-on is a long-term commitment that could extend for a decade or more. Over that period, governance becomes a critical driver of outcomes.

Trustees need to monitor funding positions, covenant strength, liquidity and regulation while making timely investment decisions as conditions change. For many schemes, this increases the importance of delegated investment models and specialist governance support, allowing strategic decisions to remain with trustees while day-to-day implementation is managed continuously.

Implementation itself can become a meaningful source of value. Efficient trading, portfolio rebalancing, liquidity management and collateral optimisation may appear incremental in isolation, but over a long-term run-on strategy they can compound into materially better outcomes while preserving the flexibility to adapt if required.

Run-on is expanding the range of pension endgame options, but it is also changing how trustees should evaluate investment success.

Rather than focusing solely on funding level or return targets, schemes should consider whether they can generate sustainable net value through an investment strategy that aligns with the intended use of surplus.

A successful run-on strategy is unlikely to be defined by how much surplus it generates, but by how efficiently that surplus is created, managed and converted into better long-term outcomes for members and sponsors.

To learn more, view the full recording on the Trustee Exchange.

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.