DB Endgames and Surplus – A Strategic Crossroads for UK Schemes
For Professional Clients Only
James Patten, partner at Aon, and Lucy Barron, partner and head of investment endgame at Aon look at how UK schemes are rethinking their endgames in this article.
As UK defined benefit (DB) schemes reach unprecedented funding levels, Aon’s 2025/26 Global Pension Risk Survey reveals a sector at a strategic crossroads, on both determining long-term strategy (‘endgames‘) and the use of surpluses.
Rising scheme funding levels have prompted most trustee boards and sponsors to evaluate (or re-evaluate) their endgame options. Our survey showed 98 percent of schemes had a view on their endgame, with most either intending to buyout (52 percent) run-on for the long-term (18 percent) or run-on more flexibly (22 percent) for a period of time (perhaps as illiquid assets run-off, or a short-term run-on in such a way that benefits can be insured at short notice should objectives change or market conditions arise). As such, 40 percent of schemes surveyed are intending to run-on beyond the point buyout is affordable. Sometimes this is with a view to addressing practical considerations before a buyout, and sometimes with a view to generating surplus.
Views on preferred endgames vary dramatically by scheme size. Among £5bn+ schemes, 50 percent intend to run-on long-term. Of those, 14 percent describe themselves as aiming to buyout as soon as affordable, with 32 percent planning for a flexible run-on. By contrast, among sub-£100m schemes, buyout is the overwhelmingly preferred endgame, with 76 percent intending to buyout as soon as affordable.
This makes sense. For schemes with a larger asset base, the expected surplus generation from run-on will be meaningful versus the governance costs and management time. For smaller schemes, buyout offers access to an insurer’s significant economies of scale in addition to the inherent underlying risk transfer.
What is clear is that the endgame will create a defining legacy for scheme members and the sponsor, so it is important to get this right - with an appropriate audit trail in case the decision is ever challenged. A key first step will be for the trustees and sponsor to come together to agree on a set of joint objectives. This will enable the parties to determine their priorities, which will then influence the development of their ideal endgame decision both considering the growing spectrum of options, and their pros and cons (with financial modelling to support this if required). Finally, there needs to be a focus on delivery to maximise value for the sponsor and members, while managing risk and avoiding roadblocks. Here, experience has shown that getting the investment execution right, is vital for the success of any endgame strategy.
Given the strong funding level of most schemes, surpluses present great opportunities, and fundamental challenges - for example, how should the surplus be distributed. Around a fifth of schemes have not yet considered any use of surplus in future. Where surplus use has been considered, around half are comfortable using it to meet expenses, while around a quarter of schemes intend to use the forthcoming surplus flexibilities to enable regular refunds to sponsors. Another fifth have considered using DB surplus to meet DC contributions.
Surplus can also be used to benefit members. Around 18 percent of schemes are planning regular enhancements to member benefits with 22 percent planning an enhancement to member benefits at the point of buyout.
Some schemes are already sitting on a large surplus. CFOs of these schemes will often be keen to utilise this capital within the business, typically seeking to agree surplus distribution policies with their trustee board, or potentially planning to buyout to access the surplus.
2026, and 2027, will represent an important crossroads for industry as market practice emerges regarding how much surplus should be distributed to members compared with being returned to the sponsor - and how to cut the cake when it comes to the members’ share. We are also likely to see an evolution to scheme investment policies to give the liquidity needed to enable surplus distribution or implement buyout, while retaining high hedging levels on the relevant basis. Schemes running on will also focus on the appropriate level of return to continue to generate fresh surplus.
James Patten
Partner, UK DB Endgame Strategy Team
Lucy Barron
Partner, Head of Investment Endgame
Compliance: A17-310826.
