The era of choice in DB endgames

By Rosie Twist, Origination and Execution Director

The run-on vs buyout debate has been at the forefront of industry discussion in recent years. In anticipation of the changes to surplus extraction rules that have now come into force in the Pension Schemes Act 2026, trustees have been considering whether it would be appropriate to run on over the long term - or for a period of time - before securing members’ benefits with an insurer.

The Pension Schemes Act 2026 also expands the target market for superfunds by removing one of the Pensions Regulator’s gateway tests for transferring to a superfund - that the scheme cannot afford to buy out with an insurer in the foreseeable future. This gives some trustees more choice when shaping their scheme’s endgame strategy.

Greater choice and flexibility is welcome, but it places more responsibility on trustees to weigh their options carefully, fully understand the differences between their options, and make decisions that deliver the best outcomes for members. There is no one-size-fits-all solution – every pension scheme is unique, and the right endgame for each scheme will depend on its specific circumstances.
For many, member security is at the heart of these discussions. There are many differences between the pensions and insurance regulatory frameworks that trustees will want to consider. The insurance regime continues to stand out as a leading solution for managing the key risks inherent in a pension scheme, offering additional security and capital strength, and providing protection against severe, unexpected events, as we set out below.

Management of key risks

The key risks inherent in a pension scheme are typically investment and longevity risks. Insurers do not invest like pension schemes. The regulatory rules governing insurers, known as “Solvency UK”, requires insurers to hold highly predictable assets which generate regular cashflows, tightly matched to the expected benefits that are to be paid to members. This usually comprises government bonds, high-quality corporate bonds, and productive finance such as infrastructure and housing. Defaults are rare due to the quality of these investments - and insurers plan for them by factoring expected losses into their portfolios.

Longevity risk is typically reinsured, with insurers passing it to a wide panel of reinsurers for diversification. Both insurers and reinsurers benefit from longevity pooling and offsetting: by combining millions of lives, they can rely on the law of large numbers to make mortality rates more predictable, supported by vast datasets for accurate forecasting, and they can also offset some of these risks against other life insurance products.

Security and capital backing

In addition to holding assets to pay benefits, insurers must maintain extra capital sufficient to withstand a 1-in-200-year risk at any time. What does that mean in practice?

Imagine someone living near a river that rarely floods. To prepare for the worst, they build their house on stilts, keep backup power and water supplies, rehearse evacuation plans, and hold financial reserves and insurance to cover full replacement costs multiple times over. They’re not just ready for a flood once in 200 years - they’ve structured their entire lifestyle to withstand that level of disruption every single day.

Insurers operate on the same principle: they must be robust enough to survive very rare events, even if they occur repeatedly. In fact, many insurers hold significantly more capital than required - L&G, for example, held 210% of its capital requirement as of 31 December 2025, more than double the regulatory amount.

What happens if it goes wrong?

The insurance regime is designed so that pension payments are funded by highly predictable, income-generating assets as described above. If an insurer’s capital falls significantly, the Prudential Regulation Authority, which forms part of the Bank of England, intervenes and can take steps to restore it, which may include transferring liabilities to another insurer. Even in the unlikely event that capital is exhausted, the underlying assets remain available to pay benefits - and if not, the Financial Services Compensation Scheme will pay members their benefits in full.

A comparison with the pensions regime

In contrast to insurance, pension schemes and superfunds have more scope to take risk under the pensions regime. They are not required to hold investments that tightly match expected benefit payments, and can invest in a wider pool of growth focused investments such as equities. While this increased investment opportunity set could generate surplus for members and sponsors, the protection if things go wrong could be limited. 

For example, both the security offered by a sponsor covenant and the capital held by a superfund have limits: the covenant can be restricted depending upon the strength of the employer, and whilst the current superfund’s capital requirement is enough to withstand a 1-in-100-year risk over a five-year period, once that capital is gone, it doesn’t have to be topped up. Drawing on our earlier analogy, this is like living in a strong, well-built house that can withstand some storms - but it isn’t designed with the same intrinsic safeguards as a home built to endure floods every single day.

If a pension scheme or superfund fails, members fall back on the Pension Protection Fund (PPF). However, PPF benefits can often be lower than those originally promised, meaning members could see reductions. 

What does this mean for trustees?

When comparing the security of endgame options, trustees should consider the level of risk in funding and investment strategies under each approach, the protection available if downside risks materialise, and the potential impact on member outcomes. These factors are interconnected: more risk requires more security and capital backing, and both influence the likelihood and severity of adverse events.

If the priority is long-term benefit security, insurance, for many, remains the best-in-class solution. If generating surplus under run-on or in a superfund is the goal, then safeguards may be needed to manage downside risk.