UK defined benefit pension schemes boast over £200 billion in aggregate surplus right now. That’s according to the Pension Protection Fund’s Purple Book — a staggering pile tempting trustees away from costly buy-outs.
But here’s the hook: Ortec Finance’s fresh modeling on a hypothetical £3bn scheme, funded at 105% on a low-dependency gilts-plus-0.5% basis, crunches 10-year stochastic scenarios. Cumulative net present value of returns? It varies wildly, underscoring why run-on strategies — keeping the scheme alive, paying benefits in-house — demand surgical precision.
Run-ons keep operations humming like always. Assets stay under trustee control; payouts roll out on schedule. Yet Ortec hammers home the shift: surpluses beckon for extraction, but investment, longevity, and governance risks don’t vanish to an insurer. They’re yours, forever.
“Crucially, unlike an insurer buy-in or buy-out arrangement, the scheme’s funding risks — including investment risk, longevity risk, and governance risk — remain squarely with the trustees and sponsors.”
That’s Ortec, straight up. Spot on — and a wake-up call amid buy-out premiums hitting 25-30%.
Run-On Flexibility: Illiquids Welcome, But Liquidity Bites Back?
Love the pitch? Run-ons let you dive into illiquids — infrastructure, private credit — unconstrained by insurer regs. Cashflow-driven investment (CFDI) shines here: model liquidity needs against payouts, and you’re golden. Ortec nods to broad asset classes, no vanilla bonds only.
But. Trustees, don’t get cocky. One rogue market dip, and illiquid bets turn toxic when cash calls hit. We’ve seen it before — think 2008, when UK pension deficits ballooned 30% in months, forcing sponsor bailouts that scarred balance sheets. My take: run-on’s edge erodes fast without CFDI rigor; it’s no free lunch.
Picture this scheme. 105% funded. Surplus triggers at 110% year-end — extract excess. Drops below 100%? Lump-sum sponsor top-up restores the floor. Simple. Yet Ortec’s scenarios spit out NPV swings: positive in bull runs, gut-punch negatives when gilts spike or equities crater.
Surplus Extraction: Build the Framework or Bust?
Ortec lays it out clean. Triggers? Say 110% on low-dependency basis, averaged over 12 months to dodge volatility whiplash. Prudent — markets don’t care about your timing.
Extraction rates? Straight excess, or graduated: 50% year one, ramp to 60%. Keeps a buffer. Recovery plans kick in on deficits — conditional top-ups, time-averaged. Sharing? Sponsors hog it all, or toss crumbs via indexation hikes.
Sounds mechanical. It’s not. Stress-test relentlessly. Upside feasts lure; downside famines kill.
And the unique angle you’re not hearing from Ortec’s PR gloss: this mirrors the 1990s endowment mortgage scandal. Savers chased ‘guaranteed’ yields in equities; crashes wiped promises. Today’s run-ons? Same vibe — trustees chasing surplus highs, ignoring tail risks. Prediction: by 2030, half these run-ons flip to buy-ins when longevity bites harder than models admit.
Why Stochastic Modeling Isn’t Optional for Run-Ons
Ortec projected strategies over 10 years. Metrics? That NPV of net returns — surpluses out minus contributions in. Central to sponsors, they say.
Take LDI-heavy portfolios: resilient to rates, but equity slumps erode. Diversified alts? Higher yields, bigger drawdowns. Results scream balance — no holy grail.
Trustees, run your own. Generic models fail; tailor to your £3bn beast’s duration, demographics. Governance risk? It’s the silent killer — lax oversight, and poof, surplus gone.
Flexibility’s the sell. Buy-outs lock you in; run-ons adapt. But adapt to what? Rising longevity (UK life expectancy up 2 years since 2010), stubborn inflation, sponsor credit crunches.
Look. If your scheme’s mature, low-dependency funded north of 105%, run-on computes. Extract smart, mitigate hard. Otherwise? Buy-out now, sleep easy.
Skeptical? Me too on the hype. Ortec’s paper nods risks, but trustees hear ‘flexibility’ and dream riches. Reality: ongoing vigilance, or it’s trustees’ funerals.
Is Pension Run-On Right for Your DB Scheme?
Short answer: maybe, if risks align. Small schemes? Liquidity traps await. Mega-funds like £3bn? Scale absorbs shocks better.
Market dynamics shift fast. TPR’s 2023 funding code eases surplus rules; employer covenants strengthen. Yet SSF consolidation looms — 5,000 schemes to 300 supers? Run-ons could consolidate internally first.
Don’t sleep on costs. Admin fees grind 0.2-0.5% annually; buy-outs bundle them away.
What Does Ortec’s £3bn Model Predict?
NPV medians positive across strategies, but tails? 10th percentile: -£500m drags. Equity tilts amplify volatility — sponsors hate that call option bleed.
Insight: pair with dynamic de-risking. Hit 120%? Dial alts down. It’s adaptive armor Ortec implies, but doesn’t blueprint.
Trustees, stress your path. Sponsors, align incentives — share surplus, bind loyalty.
Run-ons aren’t retreat; they’re forward defense. But only with data teeth.
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Frequently Asked Questions
What is a defined benefit pension run-on?
It’s running the scheme indefinitely post-maturity, paying benefits from assets, extracting surpluses — no buy-out needed.
How to extract surplus in DB pension run-on?
Set triggers (e.g., 110% funding), rates (graduated), recoveries (deficit top-ups), and share mechanisms. Stress-test via stochastics.
Run-on vs buy-out: which is better for pensions?
Run-on offers flexibility and cost savings if risks managed; buy-out transfers them fully, pricier but certain.
