Buyout is increasingly seen as less attractive for well-funded, large defined benefit (DB) pension funds, according to a report from Brightwell, as stronger funding positions prompt trustees and sponsors to reassess endgame strategies.
In January 2025, the UK government published plans to lift restrictions on how well-funded, occupational DB pension funds that are performing well will be able to invest their surplus funds, with the goal of driving economic growth.
At the time, the government had estimated that the total surplus within DB pension schemes stands at £160bn (€190bn).
The report – DB 2036: Out of the woods? Shaping the future of UK pensions – explores how trustees, executives and sponsors are weighing priorities, pressures and ambitions for the decade ahead. A central theme is the growing divergence in endgame thinking by scheme size.
For large, well-funded schemes, buyout is no longer viewed as the default destination. According to the report, these schemes have sufficient scale, governance capability and covenant strength to manage risks and deliver member benefits directly
Running on allows them to retain control, which many decision-makers say outweighs the perceived security or simplicity of transferring liabilities to an insurer.
The report also points to a growing recognition that keeping schemes open can preserve more value for members and sponsors, rather than crystallising it through an insurance transaction.
By contrast, mid-sized pension funds face a more finely balanced trade off. Although funding and governance standards have improved, a lack of economies of scale means the ongoing costs of administration, governance and investment can erode surplus, making self-sufficiency less compelling.
For smaller schemes, the endgame question is described as more acute still. Leaders of larger schemes expect smaller counterparts to be actively considering consolidation or buyout, given the disproportionate administrative and governance burden relative to their size, according to the report.
Across the sector, decisionmakers are described as “sharply” aware of reputational and member perception risks, particularly around how endgame decisions are communicated and experienced. For schemes opting to run on, there is an increased focus on operational resilience and member experience, with digitalisation and efficient administration seen as critical.
Many pension funds are, however, holding fire, the report notes. A strong desire to keep options open is evident, with trustees building flexibility into strategies while awaiting further regulatory clarity. The interaction between surplus policy, endgame strategy and consolidation options has left some in a watching brief, assessing how peers move before committing.
Wyn Francis, chief investment officer at Brightwell, said that five years ago, the “gold standard” was seen as a buyout, with sponsors wanting to get schemes off their books.
He said: “We are now in a position where funding is certainly stronger and more stable, so there is talk of upside.
“The change in the environment, the noises coming out of regulation and better funding positions are making people reflect on what would have been a very easy decision for them.”
Francis said the improved funding backdrop has also shifted portfolio construction, with schemes building more resilient, “LDI-tuned” portfolios. He expects this to mean greater emphasis on cashflow matching and cashflow-generating assets with lower risk, combined with a liquid set of assets to maintain flexibility.
Gilts are also likely to remain central to DB portfolios, he added, given the collateral requirements associated with hedging strategies.
