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Unlocking surplus in the endgame
What key trade-offs do schemes need to weigh up as they choose to run on and target benefit uplifts for members?

This article is an extract from our Solutions outlook 2025.
For many schemes, 2024 was a time of reflection about their long-term objectives. We expect these conversations to increase in 2025 – particularly when schemes enter their valuation cycles – and the new funding code starts to apply.
Could run on be the answer?
Many schemes that are already or nearly fully funded on a buyout basis may still wish to run on. There are several reasons for this.
For instance, schemes may not be ready to buy out if they have governance hurdles to overcome, data and benefit specifications to collate, or illiquid asset holdings that need reviewing and can't be transferred to an insurer.
However, there’s a powerful reason why even those schemes in a position to buy out may not choose to do so in reality. That motivation lies in the notion that persistent surpluses could potentially be harnessed for the benefit of the sponsor, DB members (in the form of increased benefits or better member experience) or even DC members.
So how should these schemes think about their risk tolerance as they seek the key to unlocking surplus successfully?
As with strategy design in general, there is no one-size-fits-all solution. In a recent whitepaper, we’ve looked in detail at how schemes need to weigh up trade-offs when it comes to meeting their objectives. Asset / liability modelling can help schemes achieve this.
Are security and surplus extraction both possible?
To illustrate, let’s consider an example trade-off between the goals of benefit security and the level of regular surplus extraction.
The scheme in this case study invests in a CDI strategy and is initially 110% funded on a suitable basis[1]. Surplus above a certain funding level threshold (as opposed to above a certain amount) is extracted annually. The chart below shows the impact on average surplus extractions and benefit security of varying that threshold. To measure benefit security, we’ve used the probability that the scheme remains at least 100% funded in 10 years’ time.
As might be expected, the lower the threshold, the more surplus is extracted on average each year, but the less secure benefits are. If no surplus is extracted the probability that the scheme will still be fully funded (or higher) after 10 years is just over 95%.
Why not 100%? The answer is partially that some investment risk remains. Furthermore, there is the long-term risk that liabilities increase due to members living longer (longevity risk), which is difficult to mitigate in the asset portfolio for all but the largest schemes.
Importantly, the overall trade-off between surplus and security is nonlinear. If the threshold is high, it is possible to extract surplus with minimal impact on benefit security, but the compromise accelerates as the extractions increase. Similar curves can be plotted at different starting funding levels, as shown below:
Here the strength of the employer covenant is important – the above calculations assume no deficit contributions are received in downside scenarios but in reality a strong sponsor is likely to be able to bail out an underfunded scheme.
For many schemes average extractions of 1.5% per annum over 10 years will be extremely attractive – for a scheme with an average asset value of £1bn over the period that £15m could represent a benefit uplift plus distributions to the sponsor.
Designing surplus extraction and investment policies for the new DB landscape is no easy matter. We believe that adopting a holistic approach in combination with scheme-specific analysis can help schemes to understand the trade-offs – including weighing up surplus generation versus long-term security – for their bespoke situation.
Read our full Solutions outlook 2025.
If you’ve enjoyed this content, we’d like to highlight that you can find all our latest content for DB schemes in one place at our designated DB blog page.
[1] We have used a dynamic discount basis that varies with credit spreads, but is in line with a gilts basis when spreads are at average levels. This approximates a buyout basis for a mature scheme. The investment strategy could, of course, be higher or lower in risk, which would impact the frontier shown.
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