Strategic run-on has never been more accessible as an endgame strategy, with the defined benefit (DB) pensions market evolving rapidly to create new options for trustees and sponsors, according to a report from EY.

Its Strategic Run-on Report noted that while much of the new legislation is yet to come into force, conversations have already moved on from the strategy being a controversial topic to it becoming an option that should at least be considered to meet regulatory expectations.

EY observed greater openness from trustees to seeking member benefit improvements once member security had reached an acceptable level, although opinions varied on what ‘acceptable security’ meant.

Trustees were also beginning to challenge the assumption that buyout provided a material increase in security for members in all cases, and had a growing belief that strategic run-on can provide levels of security that are sufficient for the medium term without going to buyout.

For well-funded schemes, trustees’ focus on covenant had “somewhat lessened” in recent years, although covenant was again becoming a central part of the strategy for schemes considering strategic run-on, EY noted.

On the corporate side, sponsors were found to be recognising how future surplus refunds could be used to grow and support their businesses.

However, while companies were open to exploring strategic run-on, scepticism remained as to whether it presented an attractive business opportunity, with sponsors still keen to offload pension risk, responsibility, and management time.

Meanwhile, early adopters were discussing optimising the practicalities of run-on, and EY highlighted the potential to use DB surpluses to fund contributions in a separate defined contribution master trust as an example of practical innovation.

EY added that, where a company and trustee agree on a surplus-sharing approach, it could be expected there will be a “reasonable option” available for implementing it.

“The DB pensions market has evolved rapidly over the past year and is now at an important inflection point,” commented EY UK pensions consulting leader, Paul Kitson.

“Policy change, regulatory clarity and market innovation are creating new options for trustees and sponsors as they assess surplus and plan for their endgame.

“While buyout remains the primary focus for many schemes, strategic run-on has become a credible alternative where member security, covenant strength and surplus sharing can be effectively balanced and is set to be a larger part of trustee and sponsor endgame discussions going forwards.”

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