Run-on and surplus sharing – The STAR covenant framework

I recently joined Jacob Shah on stage at the 2026 LCP DB Conference to take a session called “It’s time to stop de-risking”.

This may seem like quite a provocative statement, but one of the main thrusts of the session was actually about how using the covenant flexibly can give stakeholders greater confidence for higher growth investment strategies where a run-on and surplus sharing approach is being taken.

Such confidence benefits all stakeholders because, where trustees can get more certainty that existing promises to members can be underwritten, a virtuous circle can be created

I’ve advised on a number of run-on strategies now. All situations are different and a scheme’s existing funding position, as well as the strength of the employer covenant at the outset, will influence how the strategy is formed.

However, there are common threads running through the thought processes on how covenant support can be utilised, and how this may change across a scheme’s journey. 

At the conference I highlighted a simple framework that can be used to focus where covenant fits into a run-on and surplus sharing strategy:

Starting position

The sponsor is the ultimate backstop for risk taking by a DB scheme. Whilst there are some exceptional cases where a scheme has run-on without an employer, in practical terms an intentional run-on strategy only makes sense where there is confidence that the employer will be around for the foreseeable future. This is because in most cases, for a suitable investment return to be generated to make the process worthwhile, a run-on strategy will need to be in place over a number of years.

Therefore, this should be validated upfront by a proportionate covenant assessment, which could simply be a tailored extension of regular covenant advice that the trustees already commission.

In particular, it will be important for the assessment to focus on a sponsor’s prospects and longevity, covering expectations for its sector, its competitive position and diversification, and its financial resilience.

Thorough contingency planning 

I’ve found the best results can be achieved where trustees and sponsors collaborate when forming the run-on strategy. A tried and tested way to focus on the risks that matter is for working groups to be set up at the outset so potential downside scenarios can be considered. 

Contingency plans can then begin to fall out of this thinking. For example: 

• What are the foreseeable risks that could materially weaken the sponsor and, if they were to occur, what actions could be taken?
• How far would the funding level need to drop before it may be necessary for contributions to switch back on, and how are triggers set to ensure this happens? 

A key concern will be scenarios where a scheme moves back into a deficit at the same time the sponsor becomes distressed. To cover these adverse outcomes, I’ve found that third party sources of contingent asset support, such as surety bonds or letters of credit that trigger if a sponsor can no longer step in, give valuable peace of mind to trustees.

Ring fenced cash can also do the same thing, and other more innovative and specialised approaches can also work – it’s all about finding the right solution for the circumstances.

Appropriate funding buffers 

This is where integrated thinking is really important. Advisers should work together to establish the risk buffers that are needed — identifying the level of surplus required to provide confidence that a scheme will remain fully funded after a downside shock.

Trustees may be comfortable with a smaller buffer where there is greater confidence in the strength of the sponsor and any related contingent support package, and vice versa.

And this buffer can also provide a useful benchmark for when surplus distribution may become appropriate. 

Regular monitoring 

Once a scheme is funded in excess of this buffer level, in terms of day-to-day risk management, covenant can perhaps take a bit more of a back seat. 

But - and it’s an important but - regular covenant monitoring remains critical to make sure the trustees are quickly able to take action if the covenant unexpectedly weakens, in line with their contingency plans. 

For such monitoring, we have worked with trustees and sponsors to establish key metrics and traffic light systems to give them regular views on whether: 

• things remain “ok” with their strategy from a covenant perspective;
• some covenant risks are beginning to materialise which should be investigated further; or
• serious thought should be given to the continuing viability of the strategy from a covenant perspective. 

We have also helped to develop information sharing protocols to document the business as usual and event driven information that the sponsor will provide to the trustees to enable effective covenant monitoring. Many schemes will already have had these in place, but it pays to give them a refresh given objectives and risks will likely have changed since they were originally put in place.

Summary: Is it time to stop de-risking?

So, is it time to stop derisking? Maybe! 

My key message is that a run-on and surplus sharing strategy should not mean taking more risk without protection. Rather, it’s about using the covenant intelligently to give trustees confidence to invest for the long term, targeting higher returns that can potentially benefit both members and the sponsor, while having the protections in place to respond if circumstances change.

The STAR framework provides a simple way to think about this: establish confidence in the Starting position, Thoroughly plan for the downside, reach and maintain an Appropriate funding buffer and keep the covenant under Regular review while having the protections in place to respond if circumstances change.