Running on your DB pension Scheme - The (not so) new alternative to buyout

Run-on is not a new concept for defined benefit (DB) pension schemes
Sponsors, trustees and their advisers have been working together for years to run-on DB pension schemes and pay members benefits. Improved funding positions have provided an opportunity for DB schemes to turn their attention to their longer-term strategy rather than focusing on achieving full funding on technical provisions.
A tailored approach to running-on is necessary to achieve the best outcome for stakeholders and DB pension schemes need to draw on their adviser’s experiences in actuarial, investment, benefit design, governance, covenant, risk management and risk transfer, to ensure they can make informed decisions.
Meeting your pension scheme objectives
When considering run-on, DB pension schemes should take flexible strategic decisions that can adapt to future changes. We have found that most DB pension schemes plan to ultimately insure remaining benefits through a buyout but running-on in the short to medium term, with specific objectives or in preparation for risk transfer, could lead to better outcomes for members and sponsors.
For open schemes, or those with aspirations to run-on for the long term, a holistic approach across covenant, investment, and funding advice can improve efficiency and ensure that objectives are met DB pension schemes need to establish the appropriate structure, keeping a focus on outcomes, and ensuring efficient implementation. Key elements will include collaboration between sponsors and trustees, risk management, effective governance, covenant assessment, and funding considerations.
What schemes can run on?
Some examples where our clients have an active run-on strategy include:
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Open schemes
who are running on to fund future accrual in a cost-effective way for sponsors and members. -
Closed DB schemes with discretionary benefits
where they are funded and paid on a regular basis; risk transfer options are unattractive due to the need to crystalise the discretion. -
Immature schemes
where run on is being targeted in the medium term to avoid a comparatively prudent buyout pricing and improve value release for the sponsor and supplement member benefits. -
Surplus generation to support DC savings
to fund DC contributions for the sponsor and/or make DC benefits more generous to improve DC member outcomes.
How can we help?
Some of the main elements of how we consult with DB Pension schemes are:
Next steps?
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