For a defined benefit (DB) pension scheme considering a “run-on” strategy, day-to-day operations will remain broadly familiar — assets continue to be managed by the scheme, and benefit payments are met as they fall due. However, according to Ortec Finance, there are several critical factors that trustees and sponsors must carefully consider before committing to this path.
The WealthTech company recently delved into run-ons n DB pension schemes.
Surplus extraction and risk exposure
As surplus extraction becomes an increasingly likely outcome under a run-on arrangement, Ortec Finance stresses that a robust surplus extraction framework must be designed, refined, and rigorously stress-tested. Decision-makers require a comprehensive view of both upside and downside risks before acting.
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. Ongoing monitoring and active mitigation are therefore essential to managing these exposures effectively, it said.
Investment strategy flexibility
One of the advantages of a run-on investment strategy, as highlighted by Ortec Finance, is the flexibility it affords in investing in illiquid assets. Risk modelling should be conducted to determine the level of liquidity needed to meet future benefit cashflows, and a cashflow-driven investment strategy may remain entirely appropriate. The range of eligible asset classes during a run-on period is broad and not limited to conventional instruments.
Designing a surplus extraction framework
Ortec Finance outlines several key components that must be incorporated into any surplus extraction framework:
- Extraction level: The trigger for surplus extraction is typically a funding level on a specific liability basis — for example, 110% on the low-dependency basis. An additional layer of prudence could be applied, such as requiring the average funding level to exceed that threshold over the previous 12 months, to account for market volatility.
- Extraction rate: The amount extracted could simply be the excess above the trigger point. Alternatively, a graduated approach may be adopted — for instance, extracting 50% of the excess in year one, rising to 60% in year two — ensuring a buffer is maintained to protect against downside risks.
- Recovery contributions: Should funding deteriorate, recovery contributions can serve as a built-in safeguard. These can be structured as conditional top-up rules based on the funding position at a specific point in time or averaged over a defined period, protecting members’ benefits against a growing deficit.
- Surplus sharing: Sponsors may retain all surplus generated or choose to share a portion with scheme members via discretionary indexation increases or direct payments.
Stochastic modelling in practice
In its linked research paper, Ortec Finance projected multiple investment strategies forward over a ten-year horizon using stochastic scenarios, examining performance against the key metrics most relevant to run-on decision-making.
The hypothetical scheme used in the study is 105% funded on a low-dependency basis of gilts +0.5% per annum, with a liability value of £3bn on the same valuation basis. The surplus extraction framework applied stipulates that excess surplus is extracted when the funding ratio exceeds 110% at year-end, while a lump-sum deficit contribution is triggered if the ratio falls below 100%, restoring the funding level to that floor.
The results focus on the cumulative net present value (NPV) of net return — that is, surplus extracted minus deficit contributions — a metric Ortec Finance identifies as central to sponsor decision-making in this context.
For more insights, read the full story here.
Copyright © 2026 FinTech Global
