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CLARA PENSIONS
Canada Life
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Exploring how the 2025 Pensions Bill opens new opportunities for schemes to build and share surplus, with an easy-to-follow ABC framework.
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Rethinking endgame: The ABC framework for run-on solutions
Schroders experts explore how pension schemes can balance security, flexibility and growth when designing endgame investment strategies under the new DB Funding Code.
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Rethinking DB pension scheme endgame: Designing investment strategy under the new DB Funding Code
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New support service offers new options for members at every stage of life
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As longevity reshapes retirement, both deferred and in-payment members’ needs are changing fast
From insight to outcomes: rethinking what member‑first de‑risking means
Expectations of pension scheme members are changing fast and with them, the role insurers play in supporting people well beyond their pension alone. Canada Life’s new WeCare service offers options for members.
CANADA LIFE
Latest articles
Endgame is no longer a distant destination for many DB schemes. Professional Pensions helps you cut through the complexity with trusted insight from partners.
Endgame is no longer a distant destination for many DB schemes
Endgame strategies
A new retirement reality is emerging
As longevity reshapes retirement, both deferred and in-payment members’ needs are changing fast.
As the UK’s age profile shifts decisively upward, the story of retirement is changing. Thanks to advances in healthcare and better living standards, ONS 2022‑based projections show the 85+ population almost doubling between 2022 and 2047.1 Over the same period, the UK’s median age will rise from just under 41 to over 44.2 Dependency dynamics are changing too. The old‑age dependency ratio (people of State Pension age per 1,000 of working age) will climb from 278 in 2022 to 324 by 2040.3 These rapid and pronounced demographic shifts are already reshaping the way we think about retirement. Retirees will require income and support for longer, and expect a better quality of service from those providing their pensions.
As a consequence, pension schemes’ risk and liability profiles are rapidly evolving too. Insurers supporting de‑risking must reflect this by deploying a disciplined, member‑first approach designed to deliver durable outcomes over the long term.
Pensions de-risking needs to adapt to this demographic shift
At Canada Life, we look after 3.3 million customers across the UK. Using organisation‑wide data and insights – together with Life100+, our flagship research into longer lives – we’ve built a deep understanding of how expectations, motivations and financial needs shift as people approach and transition into retirement.
What our data and Life100+ show
For deferred members, who are largely still working, our research shows that the journey into retirement is changing fundamentally. People in their late 40s, 50s, and early 60s are balancing multiple pressures: supporting older parents, helping adult children, maintaining careers, and preparing for retirement.4 How this shows up in practice: 1. More varied retirement expectations Individuals increasingly anticipate flexible transitions (reducing hours, moving roles or blending work and pension income), making retirement timing more fluid. A de-risking partner should support an increasing range of options for members as they make these critical decisions. 2. Greater need for reassurance With longer lives comes greater uncertainty. Members want to feel confident that their benefits are secure, predictable, and designed to support an extended later life. Here, insurers must evidence robust solvency, operational resilience, and consistent delivery over many years.
The path to retirement is becoming longer and less linear
For members who are retired (or ‘in-payment’), many who carry on working do so for purpose and wellbeing rather than income. Our Life100+ data shows that staying mentally and physically active outranks financial necessity (around 42% vs 25%).5 Importantly, health and care move up the agenda with age, which is why a truly member-first de-risking process safeguards retirees’ wellbeing in the round, focusing efforts beyond solely financial considerations.
Total wellbeing support is becoming a top priority
When selecting a pension de-risking provider, trustees should look for clear evidence that member needs, for both deferred and in-payment members, are built into the operating model from day one. This means: 1. Execution discipline To keep the focus on member outcomes rather than administrative processes, your de-risking partner should have a named scheme consultant, conduct early data checks at the information gathering stage, and have a structured plan for onboarding, benefit specification, and reconciliation. 2. Member first communications Members need to be reassured and well informed, so plain English communications that explain what stays the same, what changes, and what happens next, alongside continuity of payments and clear protocols for vulnerable customers, are a must. 3. Life‑event pathways and inclusive access Because life events drive many member interactions, friction‑light routes to deal with bereavement journeys, supported by multi‑channel access (secure digital self‑serve, phone, and post), ensure every member and their loved ones can get help in a way that works for them. 4. Financial strength and stewardship To keep member promises secure for decades, look for strong financial strength ratings, disciplined long‑term capital and risk management frameworks, and recognised UK stewardship credentials.
What this means when choosing a de-risking partner
At the heart of Canada Life UK’s de-risking proposition is a commitment to delivering the right outcomes for members, both today and in the decades ahead. We’re tackling longevity‑era challenges head‑on and actively pursue solutions that support a more holistic approach to members’ wellbeing. Building on our financial strength, 120-year heritage in the UK, and our global backing by Great-West Lifeco, our de-risking business is growing in a way that’s safe and responsible. We have the right culture, people, and strategic priorities in place to deliver on our promise to put members first.
Our member-first approach
Sources. 1 ONS, National population projections: 2022‑based, migration‑category variant (bulletin, 28 Jan 2025) and ‘Migration category variant, UK summary’ 2,3 ONS, 2022‑based NPPs, migration‑category variant (UK summary workbook) 4 Life100+ Report 2: Building longevity‑ready workplaces in the UK (Canada Life UK, 2025) 5 Life100+ Report 1: Exploring longevity to build financially secure futures (Canada Life UK, 2024)
Shreyas Sridhar Managing Director, Bulk Annuities
Contributor
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“We have the right culture, people, and strategic priorities in place to deliver on our promise to put members first”
Shreyas Sridhar
42%
%
of members rate staying mentally and physically active outranks financial necessity (25%)
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In this video, Shreyas Sridhar, Managing Director of BPA at Canada Life UK, sits down with Georgina Howe, Country Manager at Teladoc UK, to introduce WeCare: a new support service for Canada Life Bulk Annuity members whose schemes are in buy-out. Launching on 1st May 2026, WeCare brings together health, wellbeing, financial and legal support to help members at every stage of life. Shreyas and Georgina explore why member experience is becoming a defining factor in the pension de‑risking market, and how WeCare is designed to make a meaningful difference - from 24/7 GP access to mental health support, second medical opinions, and guidance on legal and financial matters.
With funding levels having improved materially over the last few years, many trustees are considering the merits of running their pension schemes on, either in a low dependency manner or to purposely generate surplus. At Schroders, we have long believed there are lessons that can be learned from the insurance sector’s Matching Adjustment regime when it comes to investing in a highly secure manner to match liabilities; the key foundations of which lie in high-quality, cashflow-generative, and contractual assets. That said, for pension schemes looking to run on for surplus, there is more flexibility to include other assets that insurance companies cannot. This paper focuses on how we can build up portfolios to accommodate this wider spectrum of endgame objectives.
Consistent with the DB Funding Code’s guidance, we expect trustees looking to run their pension scheme on over the medium to longer term will be seeking to strike a balance between the following objectives: Maintaining full funding on a Low Dependency basis likely with a minimum buffer above that, and meeting ongoing member benefit payments as they fall due. Improving security for members and preparing for flexibility to adapt if circumstances change (e.g. pivot to buy-out). In short, a ‘Low Dependency Investment Allocation’ (LDIA). For those looking to run on for surplus however, they will also be looking to: Grow the assests and release surplus under an agreed framework with the sponsor, subject to certain guardrails.
With the introduction of the DB Funding Code and the 2025 Pension Schemes Bill, trustees are currently facing the critical task of navigating the increasingly complicated decisions around endgame funding and investment strategies.
To limit reliance on the employer, the investment strategy should be highly resilient to short-term adverse changes in market conditions. There should be high levels of liability hedging and liquidity to meet both regular and unforeseen cash flow requirements. Both points will be important regardless of endgame objective, and as indicated we believe there are a number of lessons that can be learned from insurance companies within the ‘Matching Adjustment’ (MA) regime to achieve these objectives. Indeed, Low Dependency Investment Allocations under the DB Funding Code have many similarities with this already, as detailed below:
Key portfolio objectives
Overall, there is meaningful overlap in terms of how insurance companies and pension schemes invest to meet their liabilities. However, pension schemes have more flexibility, which ultimately means they have a competitive advantage to include assets insurance companies cannot.
DB Funding Code guidance on ‘Low Dependency Investment Allocation’ (LDIA)
We believe a Cashflow Driven Investment (CDI) solution, which is fully integrated with Liability Driven Investments (LDI), is the ‘foundation’ of a Run-On or Low Dependency Investment Allocation. As indicated, this has many similarities with how insurance companies invest their Matching Adjustment portfolios via high-quality contractual assets (albeit they tend to make greater use of longer-dated illiquid contractual investments). Contractual Assets (or CDI Assets) - largely investment-grade corporate bonds held to maturity (Buy and Maintain Credit) to increase certainty of return, assist with cashflow generation and (ordinarily) broadly track insurance pricing if circumstances change. Securitised and private contractual assets could be included subject to transferability to an insurance company and/or investment horizon. Liability Driven Investments - to supplement contractual assets (under a CDI approach) and provide interest rate and inflation protection on a Low Dependency basis.
Portfolio construction – Low Dependency
The use of a dynamic discount rate that is sensitive to credit spreads and/or reflects the yields on the assets held (less a margin for defaults) could also help materially reduce volatility on the Low Dependency basis, improving ‘resilience’ (a key measure under the DB Funding Code) and reducing the likelihood of a deficit being reintroduced. A dynamic discount rate can also be very useful to help avoid over or under-extracting surplus, when regular payments out are expected. Based on our analysis, alongside the other characteristics set out above, Low Dependency Investment Allocations should target in the region of Gilts + 0.75% p.a. to Gilts + 1.25% p.a. in order to meet the ‘resilience’ criteria; striking a balance between mitigating downside risk and enough return to have the ability to ‘bounce back’ to full funding in a reasonable timeframe.
Portfolio construction – Running on for surplus
With regards to ‘surplus assets’, these do not have to be invested in a Low Dependency Investment Allocation. Indeed, the Funding Code states that the existence of a material surplus may in itself significantly reduce the risk of further employer contributions being required in the event of adverse market movements. In these cases, trustees have the ability to invest all scheme assets, not just the surplus, in a manner different from an LDIA. This is where a pension scheme’s competitive advantage comes in; a ‘notional’ pot of assets can be created that aims to: Provide a funding buffer in excess of Low Dependency (see Guardrails from our ABC Framework). Invest in a more diversified range of liquid return-seeking assets with the aim of generating return in a risk-controlled manner (e.g. equity derivatives with downside protection). Invest sustainably Given longer time horizons, ESG and climate-related risks need to be factored in. Indeed, trustees can also consider investing for ‘impact’.
Addressing common misconceptions
Lawrence Phillips Head of Endgame Solutions
Contributors
Matching Adjustment Regime (Insurance company approach to investment strategy
DB Funding Code (pension scheme approach to Low Dependency strategy
Expected returns | Surplus
Liquidity | Liability measure
Matching Assets | Cashflow matching
Expected returns
Surplus
Return on assets is reduced by a "Fundamental Spread (FS)". The FS "covers (at least) an allowance for expected default and downgrade losses".
Surplus assets do not need to be invested in Matching Assets, but most insurers tend to hold additional assets to maintain higher capital ratios.
Surplus assets do not need to be invested in line with the LDIA. Indeed, if a scheme is in significant surplus, none of the assets need be invested in an LDIA (assuming funding is sufficiently resilient).
The discount rate must be a prudent estimate of the expected return on assets. For (a) above, the expected return on assets should have regard to material factors that may affect investment returns over the relevant time horizon, such as climate change and other systemic trends. For (b) the rate should be adjusted to allow for a prudent level of default informed and evidenced by historical data to give a return.
Liquidity
Liability measure
Given the 'cashflow matching' requirements, liquidity is less of a concern and insurance companies tend to hold more illiquid assets.
Proscribed: Best estimate liabilities using a dynamic discount rate that reflects the yield on the assets backing the liabilities. Must include prudent expense reserve and risk buffer.
Prudent assumptions, but with more flexibility: Margin over a risk-free rate (gilts) - up to Gilts + 0.5% Dynamic discount rate to reflect the yield on cashflow generative assets A combination of the above for different portions of the assets Must include expense reserve.
Trustees must ensure appropriate liquidity to meet expected and unexpected payments (e.g. transfers and collateral calls. Trustees should undertake cashflow forecasts over at least 3 to 6 months.
'Matching Adjustment' friendly assets that generate highly predictable cashflows in terms of timing and amount. Furthermore, these assets "... must ... not be capable of being changed by the issuers of the assets or any third parties" without sufficient compensation.
Matching Assets
Cashflow matching
Fully 'cashflow driven': "The maximum accumulated shortfall in any time interval should not exceed 3% of the present value of liabilities". Typically provided by investment grade securities and long-term contractual private asset.
More 'cashflow aware'. No cumulative shortfall test. Precise matching not required. Schemes "can rely on asset sales to meet a portion of their cash requirement" (i.e. reinvestment risk is permitted). Wider range of assets permitted.
Matching Assets must be: a. 'Cash flow generative' matching, and b. 'Liquid and low volatility'
Source: Bank of Enqland, 2024; The Pensions Requlator, 2024.
Gilts +1.75%–1.25%
25%
38%
10%
8%
Buy and Maintain Credit
LDI (Gilts)
Securitised Credit
Private Credit
Figure 1: Portfolio construction - Low Dependency
Source: Schroders, 2025. 616066
Figure 2: Portfolio construction - Running on surplus
Liquid Growth
Structured Equity
Either way, the investment strategy should continue to be sufficiently liquid and flexible in order to be able to adapt should circumstances change and buyout become the most appropriate or desired course of action. Alongside this, contingent assets such as surety bonds, escrow accounts or charges over sponsor assets could be considered in order to improve the covenant and ensure security of members’ benefits.
In our experience of discussing endgame objectives with Trustees, we’ve had a number of queries on the practicality of ‘run-on’ as a feasible ‘long-term objective’ under the DB Funding Code. Namely:
In other words, how are Trustees expected to navigate the journey from being underfunded on a Low Dependency basis to being fully funded in a low-risk manner, and then ultimately generating a surplus under the new DB Funding Code? This is a really important question. We believe it’s a common misconception that de-risking must take place as full funding on a Low Dependency basis approaches. If that were the case, if a scheme was looking to run-on to generate surplus, this might require them to de-risk as Low Dependency approaches, to then again re-risk only once a surplus emerges. Over a number of years this would have meant both missing out on returns and selling assets to repurchase them again at some point in the future. This does not seem to make much sense. At Schroders, we view long-term objectives as being the ultimate endgame targets upon which investment strategy should be designed. For those with a long-term target of run-on and importantly a supportive covenant, full funding on a low-dependency basis is simply a key milestone on the journey towards the endgame objective.
Regardless of trustees’ endgame objectives, it will be key to construct a portfolio that balances security, flexibility and growth. By leveraging insights from the insurance sector’s Matching Adjustment regime, we believe Trustees can enhance their ability to construct portfolios that meet ongoing obligations and adapt to changing circumstances. Drawing on our over 20 years of experience as an implementation and fiduciary manager to UK DB pension schemes, we have supported more than 40 schemes in achieving buyout objectives, leveraged our experience as a leading asset manager to bulk annuity providers, and more recently designed innovative run-on strategies for pension schemes – including our own at Schroders.
Conclusion
"...unless one finds oneself in a surplus by some fortuitous mistake, how is Run-On for surplus achievable?"
Discover how Schroders’ endgame solutions can support your scheme.
Learn more
Gerard Francis Head of UK Design & Strategic Risk
Until the 2023 Mansion House speech by the then Chancellor Jeremy Hunt the idea of a pension scheme actively seeking to build a surplus and share this with members and its sponsor was very much a niche concept.
Since then, we have seen a growing level of interest in the possibilities and how these might be achieved, with the 2025 Pensions Bill providing a clear legislative roadmap for implementation. Much of the discussion to date has been focused on macro-level issues – how much surplus might be available and how this could boost the UK economy – but the most important question for trustees is how to assess whether this is something that might be suitable for their scheme. To help answer this question we have prepared an ‘ABC’ guide to look through the noise and identify when more detailed feasibility work should be considered.
The roadmap published by the Government alongside the Pensions Bill indicates that the new surplus sharing framework will not be in place until the end of 2027. Whilst that may still seem some time away there are plenty of actions for Trustees and Sponsors to consider in preparation for this. At Schroders, we have developed an ‘ABC framework’, covering the range of factors that need to be worked through before deciding whether or not running on for surplus is something trustees and sponsors should look to implement.
Getting ready for 2027: The ABC Framework
The first question is key: “Is running on for surplus something the Trustee AND sponsor want to do?” Both the Trustee and Sponsor need to be in agreement for it to be a success, so an honest and open discussion should take place before further analysis is carried out – this avoids incurring unnecessary advisory/analysis costs if both parties are not aligned. This analysis will involve projecting the liability cashflows over time from running the scheme on versus settling the scheme’s liabilities, taking into account some of the other factors below. It is also important to consider the materiality of any surplus release to the sponsor. Even relatively small amounts could make a material difference to a sponsor’s annual profits. Trustees will also want to consider scenario analysis and stress testing to better understand the range of possible outcomes.
A) Appetite and affordability
Trustees should identify their scheme powers (and obligations) in relation to surplus. This will help ensure trustees are well placed to respond to changing regulation as it comes into force. It will be key to ensure close alignment and acknowledge the mutual benefit (whatever form that takes) between the company and trustees as early as possible, potentially via a memorandum of understanding and/or the Scheme’s first Statement of Strategy. This should also include history of how the surplus has arisen (i.e. contributions versus investment experience, plus other factors such as member experience). Indeed, The Pensions Regulator expects Trustees to have a policy on surplus extraction in place for their schemes around the release of surplus and their approach to any potential requests from the company. Considerations such as intergenerational fairness amongst members should be taken into account. From a moral hazard perspective being able to demonstrate a robust decision-making process will be important.
B) Backdrop
More detailed and increased frequency of independent covenant advice will be key to help frame the capacity of the company to support risk taking and triggers to pause surplus release. This is determined by the business model, capital structure, corporate risk profile and financial strength of the company, both today and in the future. Importantly, obtaining advice here will likely help with potential issues of moral hazard.
C) Covenant
The maturity of the scheme membership will impact the time horizon over which surplus can be released in a sustainable manner. Furthermore, understanding the level of pension cashflow and extent of funding drag will be key to determining how much surplus may be released as part of the affordability assessment.
D) Demographics
Consider what a suitable long-term reserve for ongoing expenses of running the scheme might be (as required under the DB Funding Code). For efficiently run schemes surplus release may be feasible with assets of £100m or even less. Trustees should consider buffers for other adverse factors such as mortality and data cleansing.
E) Expenses and reserves
“It is also important to consider the materiality of any surplus release to the sponsor. Even relatively small amounts could make a material difference to a sponsor’s annual profits”
Appetite and affordability
Backdrop
Covenant
Demographics
Expenses
Funding and investment
Guardrails
ABC Key considerations for run-in
Source: Schroders Solutions, 2025. 615894
The funding position of the scheme is clearly an important consideration. However, even where the funding level today is below the level for surplus release (full funding on a ‘low dependency’ basis is the minimum threshold proposed by the Government) this does not mean running on might not be feasible in the future. The investment strategy will need to strike the right balance between long-term growth to generate surplus, the ability to meet ongoing benefit payments, the flexibility to adapt should circumstances change and strong levels of risk mitigation (inc. climate related risk). The probability of re-introducing a deficit, on a sufficiently prudent basis, and not being able to meet member benefits in full in the future should be kept to a minimum – as such, maintaining a funding buffer for resilience will be important. Cashflow Driven Investment (CDI) strategies are ideally suited to these objectives, with ability to meet ongoing members benefits and surplus generation in a risk-controlled manner and with a high degree of certainty.
F) Funding and Investment
Trustees and sponsors should set clear investment and covenant triggers to enable or curtail surplus release. For example, pausing surplus release if funding falls below 105% on a Low Dependency basis or if certain corporate activity takes place/covenant metrics deteriorate. This could also consider contingent assets and a clearly defined funding backstop should the funding level deteriorate materially.
G) Guardrails
Alongside all of the above, it will be very important to maintain a fully documented audit trail of the process by which a decision to pay surplus is taken, coupled with ongoing monitoring.
We also have a demonstrable track record designing and implementing ‘Cashflow Driven Investing’ (CDI) portfolios to target endgame objectives including ‘run-on’. Indeed, as a firm, Schroders' DB pension scheme fully utilises Schroders CDI capabilities, under a strategy designed to release surplus to fund contributions into our DC Scheme – saving our business c. £8m p.a.
Next steps for Trustees
Source: Schroders Solutions, analysis as at 31 December 2024 based on assets of £550m and a funding ratio of 110% on a Gilts + 0.5% basis (Low Dependency) for an illustrative scheme with duration 18 years. Assumes surplus of £8m p.a. is distributed for 15 years, and £7.5m thereafter to maintain a minimum funding level of 110% on a Gilts + 0.5% basis. 615894
Whilst we await further guidance and legislation on surplus release, in particular with regards to Trustee duties and the Moral Hazard regime, there is plenty for Trustees to do to start preparing: Consult with legal advisors to identify scheme powers in relation to surplus (do the changes affect the balance between sponsor and trustee?) Engagement with employers as soon as practicable Implement a policy in relation to surplus release (for inclusion in Trustees’ Statement of Strategy), which details the framework Plan the journey to a Low Dependency investment strategy retaining a sufficient buffer for ‘run-on’. At Schroders, we believe the proposed reforms offer the potential to improve outcomes for both members and employers in the right circumstances. Our integrated team is ready to help navigate these complex decisions, providing bespoke advice and solutions that meet each scheme's unique needs. An example of the type of analysis we carry out with clients to assess sustainable surplus release is set out in Figure 2.
Figure 2: Illustrative Surplus Projections (Low Dependency)
+£120 Million
Gilts +1.75%
surplus distribution over 15 years
using contractual assets with high degree of certainty
Surplus Extraction (LHS)
Surplus (RHS)
