A growing number of defined benefit (DB) pension schemes are reconsidering their endgame strategies, with research from XPS Group suggesting that running on could unlock up to £170bn of surplus value over the next decade.

The report, UK DB surplus: Capturing the opportunity, highlighted a “marked shift” among medium-to-large schemes, with many pausing their journey to buyout to assess whether retaining assets and generating surplus over time could deliver better outcomes.

XPS Group head of DB run-on, Tom Froggett, noted that while buyout remained appropriate in many cases, the decision was becoming less clear-cut.

“When you do the maths, it’s clear that in the right circumstances running on can deliver significant benefits for members and employers,” he argued.

Indeed, the firm’s polling found that 41 per cent of schemes were now actively exploring run-on strategies, compared to 38 per cent focused on buyout at the first opportunity, with the remainder undecided.

According to the report, well-funded schemes could generate substantial value by continuing to invest assets and gradually releasing surplus, rather than locking in an insurance transaction immediately.

XPS estimated that this approach could deliver £170bn of surplus over the next 10 years, almost double its 2023 estimate, reflecting improved funding positions across the DB universe.

For an individual £1bn scheme, the average scenario suggested around £170m of surplus could be generated through run-on, compared to significantly lower costs required to reach low-dependency funding.

However, the consultancy stressed that any move to run-on must be underpinned by robust governance and risk management, with schemes adopting an approach akin to insurers.

This included maintaining strong funding buffers, managing risks such as longevity shocks, setting clear surplus distribution policies, and ensuring schemes remained ready to pivot to buyout if conditions changed.

XPS Group chief investment officer, Simeon Willis, acknowledged that while DB schemes were not designed to support the wider economy, surplus generation could still have broader benefits.

“Running on can provide value for members and employers, and in doing so, have a positive impact on the economy further down the line,” he added.

The report also highlighted the potential for surplus to improve outcomes across different stakeholder groups, including enhancing DB benefits, boosting defined contribution (DC) savings, and supporting employer investment.

From a member perspective, surplus could be used to offset inflation-driven erosion of pension purchasing power, while DC savers could benefit from additional contributions funded by DB surplus.

For employers, predictable surplus cash flows could support capital investment or strengthen balance sheets, the report suggested.

Despite the growing interest, XPS emphasised that run-on would not be suitable for all schemes and, in many cases, may represent a “delayed buyout” rather than a permanent strategy.

Looking ahead, the firm warned that regulatory clarity would be critical, with further consultations on surplus rules expected in 2026 ahead of new regulations coming into force by April 2027.

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