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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
SCHRODERS
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
scHroders
Rethinking DB pension scheme endgame: Designing investment strategy under the new DB Funding Code
CDI gains fresh momentum as pension schemes embrace insurer approaches
Cashflow Driven Investing: The foundation of all endgame portfolios
As longevity reshapes retirement, both deferred and in-payment members’ needs are changing fast
Canada Life
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
New support service offers new options for members at every stage of life
Latest articles
Endgame strategies
Endgame is no longer a distant destination for many DB schemes. Professional Pensions helps you cut through the complexity with trusted insight from partners.
Explore how Schroders’ LDI approach enhances the efficiency, robustness and flexibility of endgame portfolios
Liability Driven Investments: Making the most of LDI in endgame solutions
As schemes explore different endgame options, solutions that combine capital support with employer covenant protection may offer trustees an additional way to balance security, affordability and long-term certainty
Connected Covenant: adding an extra layer of protection
CLARA PENSIONS
As affordability pressures and insurer capacity constraints delay transactions for some schemes, bridge-to-buyout models are providing an alternative route
Bridge to buyout: an alternative path for DB schemes
Viewed through a member lens, transaction readiness means protecting member experience across the entire de-risking process
Becoming ‘transaction ready’: a member-focused approach to pension de-risking
Behind every pension is a person: Discover how Canada Life’s tailored services help people like Helene feel supported in moments that matter
Real support for real retirement journeys
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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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.
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.
Explore the many ways WeCare supports our members
Schroders experts explore how pension schemes can balance security, flexibility and growth when designing endgame investment strategies under the new DB Funding Code.
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.
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.
Exploring how the 2025 Pensions Bill opens new opportunities for schemes to build and share surplus, with an easy-to-follow ABC framework.
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”
Figure 1: The ABC framework
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)
CDI gains fresh momentum as pension schemes embrace insurer approaches.
Cashflow Driven Investing (CDI) is increasingly seen as a cornerstone of Defined Benefit (DB) pension scheme endgame strategies, helping schemes balance the competing demands of security, flexibility and return. While CDI is not a new concept, it is gaining renewed relevance. Improved funding levels, alongside regulatory developments such as the Pension Schemes Bill 2025 and DB Funding Code, mean more schemes are now able to adopt approaches like insurers, albeit with greater flexibility. Schroders latest report — Cashflow Driven Investing: The Foundation of All Endgame Portfolios — shares how these approaches can be implemented across different pension scheme objectives. Explore how CDI and broader contractual asset approaches can be effective tools for delivering stable income and improving certainty of returns for pension scheme endgame objectives in the full article.
View the report
Discover how Schroders’ CDI approach supports resilient endgame portfolios, predictable cashflows and flexible buyout or run-on outcomes
Explore how Schroders’ LDI approach enhances the efficiency, robustness and flexibility of endgame portfolios.
Most trustees are familiar with Liability Driven Investment (LDI) as a long-established tool for managing funding volatility while supporting return-seeking strategies. However, in today’s environment, where many schemes are now fully funded, LDI’s role has evolved, forming the backbone of Cashflow Driven Investment (CDI) approaches in particular. For pension schemes in 2026, LDI provides critical interest rate and inflation protection that many contractual assets cannot. Just as importantly, it offers a source of liquidity and access to a broader investment toolkit via derivatives, enabling more predictable return generation — an essential feature for run-on strategies. For Schroders there are four key advantages of its LDI approach. First, greater flexibility: under its segregated LDI strategies, clients have access to tools such as credit default swaps, FX hedging and equity derivatives, supporting capital-efficient portfolios without compromising collateral strength. For run-on strategies, this can help schemes maintain strong hedging alongside higher return targets, while those preparing for a buyout can benefit from a potential premium cost reduction. Second, improved accuracy: its dynamic “3D” approach uses live scheme data to incorporate daily changes in inflation levels along the term structure, as well as inflation caps and floors in liabilities. Using live scheme data helps deliver additional economic value for clients in volatile conditions compared with a static LDI hedge. Third, enhanced control: integrating LDI with other assets, including corporate bonds, improves collateral efficiency and liquidity management, reducing the risk of forced asset sales in stressed conditions. Finally, greater transparency: a fully integrated approach provides real-time visibility on hedging, liquidity and performance, supporting faster, more informed decision-making.
Explore how your scheme can harness the benefits of this strategy in today’s evolving pensions landscape
Phil Howard Head of LDI Solutions Management
What is a bridge to buyout strategy?
As affordability pressures and insurer capacity constraints delay transactions for some schemes, bridge-to-buyout models are providing an alternative route to strengthen member security while targeting eventual insurance settlement.
As defined benefit pension schemes mature, trustees are increasingly focused on securing members’ benefits and defining a clear endgame strategy. While insurance buyout remains the preferred destination for many schemes, affordability constraints, insurer capacity, and covenant considerations mean an immediate transaction is not always possible. For schemes in this position, bridge to buyout models are emerging as an alternative route to improving member security while still targeting an eventual insurance settlement.
Typically structured through a consolidator or superfund arrangement, bridge to buyout models transfer members and liabilities into a professionally governed vehicle supported by additional capital. The objective is to improve funding resilience over time while reducing reliance on the original sponsoring employer covenant. Clara Pensions is one provider operating this model in the UK market. Under its structure, transferring schemes move into ring-fenced sections of the Clara Pension Trust, supported by governance oversight and a dedicated capital buffer intended to support schemes on a journey towards eventual buyout. As schemes mature, liabilities naturally reduce and buyout pricing may become more attractive, particularly for deferred member populations where insurer capital requirements are typically higher. Combined with investment returns and additional capital support, this can improve the affordability and feasibility of a future buyout transaction. Which schemes are best suited to a bridge to buyout strategy? And what circumstances suit it best?
Discover how Clara Pensions is using this strategy to help schemes improve member security and progress towards insurance buyout. Explore: Which UK schemes are already using the bridge to buyout strategy Specific scenarios in which the strategy is well suited to schemes Trade-offs and practical considerations for trustees
As schemes explore different endgame options, solutions that combine capital support with employer covenant protection may offer trustees an additional way to balance security, affordability and long-term certainty.
For some defined benefit pension schemes, the journey to buyout is not only about improving funding levels. Trustees must also consider the strength of the sponsoring employer covenant and the role it plays in supporting member security. While bridge-to-buyout structures are designed to reduce reliance on the original sponsor over time, some schemes may benefit from retaining a degree of covenant support alongside the additional capital and governance provided by a pension superfund. One approach is the use of a connected covenant structure, which sits as an optional enhancement to a standard bridge-to-buyout arrangement. The structure retains the same core objective - transferring a scheme into a professionally governed environment with the aim of achieving a future insurance buyout - while retaining an additional layer of contingent support from the sponsoring employer. Under a typical bridge-to-buyout model, predefined funding triggers are designed to protect members and their outcomes, and to enable early intervention if required. Should funding deteriorate, additional capital may be available, while trustees can benefit from enhanced oversight and a range of options to help maintain progress towards buyout. Such a connected covenant arrangement can extend these protections by providing a sponsor backstop in the unlikely event that funding falls to levels that could otherwise lead to a wind-up scenario. Rather than creating an ongoing obligation to the scheme itself, the arrangement establishes a contingent liability to the bridge-to-buyout provider, which can be tailored to reflect the circumstances of the sponsoring employer and scheme.
Discover how Clara Pensions is using this feature as part of its bridge to buyout offering to help schemes improve member security with additional covenant protection. Explore: Which schemes this approach is particularly relevant for How retaining access to covenant support can enhance member security Examples of schemes that have benefited from this additional layer of protection
Behind every pension is a person: Discover how Canada Life’s tailored services help people like Helene feel supported in moments that matter.
Retirement journeys are rarely straightforward. Below, we explore Helene’s story which shows how tailored support, accessible information and everyday wellbeing services can help members navigate life’s transitions with greater confidence. We hear how Canada Life's Your Life Hub, WeCare and Canada Life OneView, help members stay in control of their financial future and supported in the moments that matter.
Helene is 63 and lived in France but moved to England when her daughter enrolled at a university in Leicester. She’s always worked hard to ensure that her children had a good education, often working two jobs. But Helene is someone who likes to be busy and she knows that everything she does is to support her family. She’s currently a Skilled Production Operative and really enjoys working with her colleagues. There’s a great culture at work where everyone feels like they’re part of a family. Helene is happy to keep working but as she approaches her retirement age, she’s starting to think about what she wants to do with her life. Her children have grown up and have their own lives, and she has the time to think about what she wants to do next. She wonders if there’s any way for her to review her pension through work to see what her options are. Helene remembers receiving a welcome pack from Canada Life and starts looking through her documents to see what information is available.
Meet Helene
Helene is fluent in three languages and while she is fluent in English, it isn’t her first language. She’s confident speaking the language but when it comes to reading and writing, she struggles with the more technical language. Any time she receives a letter from the council or HMRC, she always asks her daughter to read through it with her to make sure she doesn’t make a mistake. Often at work she’s asked to read company emails or complete online learning and it can make her feel a bit anxious. She doesn’t want to admit to anyone that she needs a little bit of extra support.
This is what you don’t know about Helene
One-on-one customer support We’re here to support all our members. Helene might not feel comfortable reviewing her policy documents online, but she can phone our customer representatives to talk her through her options. Helene can call our representatives at any time during our open hours and they’ll talk her through everything she needs help with. Pensions jargon buster We provide clear explanations of common pension terms to remove potential barriers in our communications. Helene can look up an explanation to any technical term whenever she needs to, at her own discretion. 24/7 access to a GP through WeCare Helene works long shifts and often through the night. She’s recently moved house and has registered at a new GP, but she can’t find the time to call and order her repeat prescription. Helene now has access to qualified UK-based GPs at all times of the day. She can book a virtual appointment with a GP and explain what she needs, at a time that works for her. Self-serve on Canada Life OneView Helene can easily update her address when she moves by logging into her Canada Life OneView account, fitting this in around her working hours. Your Life Hub Helene wants to take control of her finances. She remembers that she has access to WeCare and Your Life Hub, and she looks through both to find budgeting tips and cost-of-living support.
How Canada Life can support Helene
Explore how members’ needs and priorities change across different life stages and retirement journeys, and how we support them at every step. Read more
Member stories
Discover how WeCare supports members navigate everyday challenges and major life events with confidence. Read more
Total wellbeing support
Learn how we deliver a clear, supportive and engaging member experience throughout their retirement journey. Read more
Member experience
Notes: This story has been created to show how Canada Life can support members at different stages of life. They are not real-life stories. WeCare is a non-contractual benefit provided to defined benefit pension scheme buy-out members through Canada Life and can be altered or withdrawn at any time.
Why transaction ready should also mean being ‘service ready’
Viewed through a member lens, transaction readiness means protecting member experience across the entire de-risking process.
When preparing for buy-in, schemes have typically focused on affordability, data quality and a benefit specification that can be underwritten from day one. These remain essential, but they’re no longer the whole story. As more schemes move closer to full funding, and as the market’s understanding of good data preparation has matured, member experience is quickly becoming more central to how trustees think about transaction readiness. This means asking broader questions, such as: Are arrangements in place to ensure member option quotes can be serviced smoothly from day one following buy-in? Can the scheme communicate clearly with members about the route to buy-out, if that’s the goal? Have trustees defined what good member experience should look like during buy-in and after buy-out? A successful buy-in transaction, on its own, may not be the same as a good member outcome, and an immediate consequence of this shift is that transaction readiness must also now also mean service readiness.
De-risking with a high-rated insurer provides members with additional long-term security. However, during the buy-in period, day-to-day administration and member contact usually remain with the scheme, and trustees typically want to reassure members that the level of service they receive will not deteriorate as a result of the transaction. While buy-in doesn’t change members’ benefits, it can change how member option quotes are produced, with the insurer playing a key role in the calculations. If preparation is inadequate, quotes may take longer to produce immediately after buy-in, creating delays for members looking to make important retirement decisions. Trustees and their administrator also need to complete the data cleanse, typically within the first two years of inception. If this clean-up work drags on during buy-in, day-to-day administration can come under pressure just when trustees are trying to reassure members that the transition is a positive one.
Reducing uncertainty improves member outcomes
While every transaction is different, insurers are consistently looking for three things when engaging with a scheme, all aimed at reducing uncertainty. The same disciplines that reduce uncertainty for insurers also support a more stable experience for members. A legally signed‑off benefit specification that aligns with member data and clearly documents what is being insured, including scheme sections, underpins or guarantees, and any trustee discretions or established administration practices. Complete and consistent member data that supports both key life events and timely, accurate quotes and communications to members. A documented governance framework with key milestones and accountability for decision-making. But knowing what ‘good’ looks like is easier than delivering it. Data, benefits, administration, funding and governance rarely progress at the same pace, and work that feels sufficient for buy-in can later prove inadequate for buy-out. As schemes move closer to a buy-in transaction, progress in funding and governance needs to be matched by equal attention to data, benefits and administration, so member experience is protected throughout. Because these capabilities rarely develop all at once, readiness is best understood as something built in stages.
How readiness can be built in stages
A member-focused readiness model can help. Rather than treating readiness as a binary state (yes/no), it recognises that these capabilities develop over time, through distinct stages shaped around the member. Level 1: Foundational Trustees begin to establish control. A data readiness programme is developed, with repeatable outputs, mapped fields and a documented production method. Known issues are identified and assigned owners or funnelled into a rectification programme. Level 2: Market‑ready The scheme can now engage insurers credibly. This is typically the point at which trustees engage with insurers to shape RFPs. The data isn’t perfect, but it’s sufficiently complete for pricing. Benefit design is clear enough to answer insurer questions. At this stage, Trustees should be able to demonstrate that the scheme is not only positioned to support the premium and execution plan, but also to continue servicing members post buy-in. Level 3: Buy‑in ready The scheme can execute without operational fragility. The benefit specification is signed off, administration responsibilities are agreed, and premium settlement is feasible. Buy-in contract terms are negotiated with buy-out in mind. Member communications and servicing requirements should be understood and fully planned for at the stage, with the trustee(s), scheme administrator and selected insurer aligned on the approach and SLAs for member quotes, in addition to the key milestones to achieve buy-out. Level 4: Buy-out ready By this stage, trustees can meet the requirements for moving from buy-in to buy-out, including final data sign-off and trustee warranties. If there are unresolved issues, such as benefit corrections or equalisation, there needs to be a contractually agreed mechanism for dealing with them. This stage is crucial from a member perspective as administration now shifts to the insurer.
Key takeaway
The closer a scheme gets to Level 4, or the earlier it puts in place a credible plan to get there, the more likely it is to deliver better outcomes for members as it moves through de-risking. This can be done by engaging early, before buy-in, so trustees and insurers can take a member-focused approach. Set out clear plans for each stage, and work closely with the insurer and scheme administrator to ensure the transition to buy-out is well managed, less disruptive and more reassuring for members.
Sabeen Iftikhar Business Development Lead, Bulk Annuities
“...knowing what ‘good’ looks like is easier than delivering it”
Find out about Canada Life's member first approach.
Structured equity: A tool to generate and protect surplus in run-on solutions
As more DB pension schemes reassess their endgame options, structured equity can help harness equity upside.
The endgame option of running on a DB scheme, rather than transacting with an insurer post-DB funding code, presents trustees with several important questions: How can pension schemes make the most of their competitive advantage versus insurers — namely, the freedom from the strict eligibility criteria set by the Prudential Regulation Authority? How can they generate returns while minimising the risk of losing any surplus that has already been built up? Schroders uses a structured equity approach, alongside synthetic exposure and income enhancement, to provide explicit downside protection for resilient run-on strategies, particularly during periods when the benefits of diversification across growth assets weaken or break down completely, as seen in 2022. When managed alongside an LDI strategy, these downside risk tools can also deliver capital efficiency benefits. Assets (typically gilts) backing derivative positions can contribute to income generation, interest rate and inflation protection, and collateral management. Read the latest report — Structured Equity: An invaluable tool for generating and protecting surplus in run-on solutions — to learn: Why pension scheme surplus assets do not have to be invested in “lower risk” assets How a structured equity investment strategy can help to purposefully generate, protect, and distribute surplus
Explore how Schroders uses this approach to provide explicit downside protection and capital efficiency for run-on strategies.
Dynamic Discount Rates: Improving resilience in endgame strategies
Dynamic Discount Rates (DDR) can help pension schemes reduce funding volatility while improving certainty around surplus generation.
In a shifting UK pensions landscape, where trustees are increasingly adopting investment approaches similar to insurance strategies, the method used to value liabilities is gaining significance. Insurers, under Solvency UK, already use discount rates aligned with their underlying credit portfolios. As pension schemes adopt comparable investment strategies, it is logical for them to consider a similar approach through Dynamic Discount Rates (DDR), as Schroders experts argue in their latest report. A DDR approach links the discount rate used for funding to the expected return on the assets backing liabilities. This means that funding positions are primarily impacted by fundamental risks, such as credit downgrades and defaults, rather than short-term movements in credit spreads that do not affect cashflows. Schroders believe this approach offers two key advantages: First, it can significantly reduce funding volatility, improving a scheme’s resilience in line with the DB Funding Code. Second, it provides greater certainty over the level of surplus that can be generated and potentially extracted over time. More broadly, DDR supports a more representative view of funding by smoothing mark-to-market fluctuations and aligning valuation with long-term investment strategy – an increasingly relevant consideration for schemes pursuing low dependency or run-on objectives.
Access the report to discover how the approach was used to benefit a £1bn pension scheme.
