Pension Scheme Run-on: Recent Developments and Investment Implications

If you were to play buzz-word bingo at a pensions-industry conference, “run-on” would almost certainly be near the top of the list. The UK government has announced rule changes that could affect many defined-benefit (DB) pension schemes as they prepare their endgame strategies. These changes include the removal of barriers to surplus extraction, part of the government’s push to boost economic growth through investment in productive UK assets.¹ This paper presents Goldman Sachs Asset Management’s thinking on these recent developments and what they could mean for investment strategy.

Rationale for Run-on

Run-on is an endgame strategy that involves taking a measured amount of investment risk with the objective of generating a funding surplus. This surplus can then be extracted from the scheme and paid to the sponsor, used to enhance member benefits or to fund a defined-contribution arrangement, or a combination of these options. We see run-on as distinct from self-sufficiency, which is typically a de-risked approach intended simply to deliver a specific set of benefits. By contrast, run-on targets more investment risk-taking with the aim of delivering surplus assets.

The rationale for adopting a run-on strategy can vary. For some schemes, especially those large enough to manage the expenses this strategy entails, the ability to generate meaningful cashflow with limited investment risk can be attractive to both sponsors and trustees. While buy-out remains the most common endgame ambition for DB schemes in the UK,² we expect more schemes to consider run-on in the years ahead.

The Surplus Question

DB schemes have historically faced several obstacles to run-on, including regulatory restrictions and taxes on surplus extraction – not to mention that relatively few schemes had a surplus to begin with. This is changing:

• Funding levels in the DB industry have improved significantly in recent years, with three quarters of schemes now in surplus on a low-dependency basis.³
• In 2024, the tax on pension surplus extraction was reduced to 25%.⁴
• The government has committed to create a statutory override that would allow surplus extraction, irrespective of legacy trust deed wording, where both the trustees and sponsor agreed.⁵

The government has also confirmed that it will lower the threshold for surplus release from the current buy-out level to a low-dependency level.⁶ The reasoning is that the lower threshold could encourage more schemes to extract surplus, potentially raising tax revenue for the government and contributing to increased investment in the UK economy. The UK is not alone in identifying the revenue potential in surplus extraction. In the US, for example, the American Benefits Council recently cited an increase in federal government revenue as a potential benefit of changing current rules and allowing employers to use trapped surplus assets.⁷

In practice, however, significant changes in scheme behaviour as a result of the lower UK threshold may be hard to achieve. We think most schemes that achieve full funding on a low-dependency basis will retain an additional buffer above that level to guard against sponsor covenant risk, raising the bar for surplus extraction. We also expect trustees to establish a formal governance framework that sets out the procedure, thresholds and authorisation steps required before surplus can be extracted. A scheme should communicate transparently with its members on this issue to preserve trust and mitigate reputational risk.

Committing to Run-on

We believe run-on investment strategy will likely be centred around a full hedging of liabilities to help manage risk and a high allocation to credit, which can provide modest incremental returns and cash. This can allow schemes to pay pensions without the need to sell assets, thereby avoiding dealing costs and market-timing risk. A few of our LDI clients that have chosen to run on are using our active LDI overlay, which seeks to add value from hedge-instrument selection, duration and yield-curve positioning. The return targets of this strategy are modest – sufficient to cover portfolio and funding costs, for example – but the return drivers are typically uncorrelated with other sources of return, so this type of approach may become a more common feature of run-on strategies.

Any scheme considering run-on could benefit from defining its objectives at the start. It is common to hear schemes say they want to run on while also retaining the flexibility to pursue a buy-out at any point. In this case, a scheme’s investment strategy probably needs to target a buy-out, which means focussing on LDI and highly liquid credit to ensure alignment with buy-out pricing and remove any potential impediments to a risk-transfer transaction.

A better run-on outcome can be achieved by committing to this endgame for a period of time, for example until projects unrelated to investment, such as cleaning up member data, are completed. We believe this approach can widen the opportunity set of potential investments. This could allow a scheme to allocate to private-market or other growth assets, for example, strengthening the return potential and diversification of its portfolio. It could also enable a scheme to lean into trustees’ sustainability objectives.

A commitment to run-on could also benefit a scheme as it runs down a legacy private-market portfolio, where the time frame for completion is clearer and longer. This is something we have been doing for several recent client appointments. A sensible compromise could also be to define the longer run-on time frame while agreeing on shorter-term check-in points. These could be used to reaffirm the appetite of the sponsor and trustees for run-on and to assess the latest insurer pricing. We think this approach lends itself well to an asset-backed finance allocation, which typically has a maturity profile of three to five years.

Right-sizing the Risk

It is worth clarifying that when a scheme targets run-on, it will probably take only a modest amount of investment risk and seek assets with attractive drawdown characteristics. The compounding of investment returns combined with the time-based unwinding of actuarial prudence – and aging membership – mean that an investment strategy that targets liabilities plus 0.75% to 1.25% could deliver meaningful surplus over time, in our view. If a scheme plans to extract surplus regularly and has the governance structure in place to support this, its investments are likely to have a more static risk profile. If more intermittent extraction is planned, a scheme could adopt a more dynamic approach to risk-taking, increasing investment risk when it has a sizeable surplus, and scaling back risk when the surplus shrinks.

Governance and Delegation

A commitment to run-on entails oversight and monitoring on behalf of the sponsor and trustees. Some schemes may be concerned about the governance workload required to support this, especially since the decisions around surplus extraction and distribution are unlikely to be straightforward. We think the moderate-risk approach described above would be relatively uncomplicated to implement within clear guardrails.

In addition, tried and tested options are available for creating additional governance capacity by delegating all or some of the day-to-day implementation of investment strategy. These include an implementation manager service, whereby a scheme retains its existing adviser but delegates asset-management activity to a manager within a rules-based framework. Another option is to adopt a fiduciary management or outsourced chief investment officer arrangement, which involve at least partial delegation of investment strategy and full delegation of implementation to an external manager, leaving the scheme sponsor and trustees more time to focus on other areas. It lies with trustees to decide how much control they choose to retain over decision-making.

¹“Government Response: Options for Defined-Benefit Schemes,” UK Department for Work & Pensions. As of May 29, 2025.
²“PLSA IC 2025: Buyout Still the Most Popular Endgame Strategy for DB Schemes,” Pensions Age. As of March 12, 2025.
³“Annual Funding Statement 2025,” The Pensions Regulator. As of April 29, 2025.
⁴“The Authorised Surplus Payments Charge (Variation of Rate) Order 2024,” HM Revenue & Customs. As of March 12, 2024. The previous rate was 35%.
⁵“Government Response: Options for Defined-Benefit Schemes,” UK Department for Work & Pensions. As of May 29, 2025.
⁶“Defined Benefit Funding Code of Practice,” The Pensions Regulator. As of July 29, 2024. The code sets out the expectation that on a low-dependency funding basis, no further employer contributions to a scheme would be required.
⁷“Proposals Offer New Ways to Use Retirement Surpluses to Boost Benefits, Raise Revenue,” Chief Investment Officer. As of May 16, 2025. The American Benefits Council is a Washington, DC-based trade association that advocates for employer-sponsored benefit plans.