Buy-In vs. Run-On: Navigating Risk and Cost in Light of DB Surplus Reforms

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On 29 May 2025, the UK government published its long-awaited response to the options for Defined Benefit (DB) Schemes consultation.

The aim: to reform the DB system for the benefit of members, employers, and the wider economy, especially as many schemes now find themselves in surplus following years of strong funding improvements.

Following the consultation, the Pension Schemes Bill 2025, introduced in June, sought to lay the legislative framework for DB surplus release. A key proposal is to shift the extraction funding threshold from the traditional buyout funding level to a “low dependency” basis. This change could bring a wider range of schemes into scope for surplus extraction. As of December 2024, 76% of schemes met The Pensions Regulators (tPR) low dependency basis threshold, suggesting a substantial expansion in eligibility for surplus release.

Risk vs. Reward: Is Waiting Worth It?

For some schemes, particularly those backed by strong employer covenants, waiting to extract surplus may be a calculated risk worth taking. However, for schemes which are fully funded, this approach requires a shift in mindset: in order to make sure that reasonable decisions are taken with consideration of the relevant issues, it feels logical that schemes should think about how they can compare run-on with buy-out. Given the different regulatory regimes, this is no doubt a challenging exercise but will be important that steps are taken to ensure apples are compared with apples, especially in the face of market volatility, regulatory changes, or sponsor covenant deterioration.

For many schemes that are already in a position to buyout, particularly those without a sponsor willing to absorb future surprises, the certainty of action may outweigh the potential upside of waiting. Locking in pricing and securing member benefits now can eliminate future cost volatility and the administrative burden. Research from Standard Life supports this, showing that buyout is the preferred de-risking strategy for nearly half of UK DB schemes.

Trustee Confidence and the Accountability Challenge

Standard Life’s findings revealed that two thirds of DB trustees remain uncomfortable with the proposed surplus reforms, with only 32% expressing confidence that the changes are in members’ best interests.

Each scheme and sponsor faces unique circumstances, and as such, the question of how surplus funds will be used is far from uniform. Our recent research reflects this diversity, with expectations ranging from enhancing member benefits (38%), supporting sponsor business growth (38%), and reducing employer contributions (35%).

The key priority for trustees should remain the same as ever - ensuring there are funds available to pay benefits as they fall due. Trustees must consider how they will justify their decisions if things go wrong – working backwards, what evidence and assessments will demonstrate they properly evaluated the risks and acted in members’ best interests?

Looking Ahead

The proposed reforms under the Pension Schemes Bill 2025 are not expected to take effect until late 2027, meaning any broader impact on the pensions landscape may be delayed.

For trustees with a medium-term horizon, this creates space to revisit endgame strategies and consider whether surplus extraction could be viable ahead of buyout. However, for most schemes, surplus release will likely remain tied to the point of buyout, when member benefits are fully secured and risks are minimised. Trustees must weigh the potential rewards against the risks and costs, and ensure their governance processes are robust enough to stand up to scrutiny in the years ahead.