diff --git a/src/agents/pi-extensions/compaction-safeguard.test.ts b/src/agents/pi-extensions/compaction-safeguard.test.ts
index 509bbdd25b2..f9bffadbe37 100644
--- a/src/agents/pi-extensions/compaction-safeguard.test.ts
+++ b/src/agents/pi-extensions/compaction-safeguard.test.ts
@@ -1490,7 +1490,7 @@ describe("compaction-safeguard extension model fallback", () => {
       apiKey: null,
     });
 
-    expect(result).toEqual({ cancel: true });
+    expect(result).toBeUndefined();
 
     // KEY ASSERTION: Prove the fallback path was exercised
     // The handler should have called getApiKey with runtime.model (via ctx.model ?? runtime?.model)
@@ -1501,7 +1501,7 @@ describe("compaction-safeguard extension model fallback", () => {
     expect(retrieved?.model).toEqual(model);
   });
 
-  it("cancels compaction when both ctx.model and runtime.model are undefined", async () => {
+  it("falls back to built-in compaction when both ctx.model and runtime.model are undefined", async () => {
     const sessionManager = stubSessionManager();
 
     // Do NOT set runtime.model (both ctx.model and runtime.model will be undefined)
@@ -1516,11 +1516,25 @@ describe("compaction-safeguard extension model fallback", () => {
       apiKey: null,
     });
 
-    expect(result).toEqual({ cancel: true });
+    expect(result).toBeUndefined();
 
     // Verify early return: getApiKey should NOT have been called when both models are missing
     expect(getApiKeyMock).not.toHaveBeenCalled();
   });
+
+  it("falls back to built-in compaction when API key is missing (returns undefined, not cancel)", async () => {
+    const sessionManager = stubSessionManager();
+    const model = createAnthropicModelFixture();
+    setCompactionSafeguardRuntime(sessionManager, { model });
+    const mockEvent = createCompactionEvent({ messageText: "test", tokensBefore: 500 });
+    const { result, getApiKeyMock } = await runCompactionScenario({
+      sessionManager,
+      event: mockEvent,
+      apiKey: null,
+    });
+    expect(result).toBeUndefined();
+    expect(getApiKeyMock).toHaveBeenCalledWith(model);
+  });
 });
 
 describe("compaction-safeguard double-compaction guard", () => {
@@ -1670,7 +1684,7 @@ describe("compaction-safeguard double-compaction guard", () => {
       event: mockEvent,
       apiKey: null,
     });
-    expect(result).toEqual({ cancel: true });
+    expect(result).toBeUndefined();
     expect(getApiKeyMock).toHaveBeenCalled();
   });
 });
diff --git a/src/agents/pi-extensions/compaction-safeguard.ts b/src/agents/pi-extensions/compaction-safeguard.ts
index 92332140656..e470931ae02 100644
--- a/src/agents/pi-extensions/compaction-safeguard.ts
+++ b/src/agents/pi-extensions/compaction-safeguard.ts
@@ -761,15 +761,13 @@ export default function compactionSafeguardExtension(api: ExtensionAPI): void {
             "was not called and model was not passed through runtime registry.",
         );
       }
-      return { cancel: true };
+      return undefined;
     }
 
     const apiKey = await ctx.modelRegistry.getApiKey(model);
     if (!apiKey) {
-      log.warn(
-        "Compaction safeguard: no API key available; cancelling compaction to preserve history.",
-      );
-      return { cancel: true };
+      log.warn("Compaction safeguard: no API key available; falling back to built-in compaction.");
+      return undefined;
     }
 
     try {