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Benefits October 1, 2025
Amid Higher Funded Status, Pension Plans Consider Their Options
Due to a ‘normalized’ yield curve and strong investment performance, plan sponsors can consider de-risking or using surpluses for other benefits.
Reported by Beth Braverman
Art by Davide Comai
The assets of the 100 largest corporate defined benefit pension plans rose by $8 billion in August to $1.29 trillion, and the funded ratio of DB plans increased for the fifth consecutive month to 106.2%, according to data from Milliman.
“[The current level of funding] is a significant milestone in the DB space, as the surplus funding gives plan sponsors more options for how to proceed with their plan, whether they want to continue operating their plan on a [liability-driven investment] glide path, enhance contributions to other retirement plans or initiate partial or full pension risk transfers,” says Chris Swansey, an associate director on Cerulli Associates’ institutional team.
The surpluses reflect nearly two decades of improvements in asset values, as well as the impact of relatively high interest rates in recent years, says Zorast Wadia, a principal and consulting actuary at Milliman. Milliman research shows the improvement in funded status primarily reflects higher discount rates, which climbed 43 basis points over the past 12 months, rising to 5.53% from 5.1%.
“From a risk management standpoint, there have been lots of plans that have benefited from rising in the equity markets, along with increases in discount rates that have contributed to that large funded status growth,” says Michael Clark, senior vice president for actuarial at Gallagher.
The Center for Retirement Research estimated that public DB pension plans also have increased their funded ratio in 2025, with an aggregate 77.77% funded ratio, the highest level in more than 15 years.
Changing Interest Rate Environment
The Federal Reserve’s 25-basis-point cut to short-term interest rates in September has had little immediate impact on funding levels, since pension funds typically remain focused on longer-term interest rates. However, the potential for future cuts and an eventual decline in long-term interest rates, along with concerns that the stock market is overdue for a correction, make this a good time for plan sponsors to consider whether they should take advantage of the current environment to preserve the gains in their funded status.
“So far, the yield curve is fairly normalized, but the unknown is if economic conditions deteriorate, will you start having more inversion or a flat yield curve?” says Sri Reddy, senior vice president of retirement and income solutions at Principal Financial Group. “That could be dramatic, but right now there’s still ample opportunity to take advantage of the normalized yield curve.”
In addition to pursuing a liability-driven investment approach, many plan sponsors are also considering other de-risking strategies to reduce volatility and better align plan assets with obligations. These strategies can include annuity buyouts, in which the plan transfers a portion or all of its liabilities to an insurer, or retiree lift-outs, which focus specifically on transferring the liabilities of retirees already receiving benefits.
Both approaches can significantly reduce a plan’s obligations and, therefore, the ongoing risk for the plan sponsor, but they come with trade-offs. Employers must weigh the immediate financial impact of these transactions against their long-term benefits. For example, annuity purchases can be expensive, but their cost tends to fall when interest rates rise. At the same time, moving too quickly may mean giving up potential investment gains, if funded status continues to improve, Wadia says.
“Markets are extremely strong and have been strong this whole year,” Wadia says. “So [de-risking via annuity purchases] is not necessarily your best move. It depends on your specific circumstances, and each plan sponsor needs to evaluate that specifically.”
Half of plan sponsors surveyed by Mercer this year said they planned to make changes to their plan design, and nearly 60% with closed or frozen plans said they were considering reopening them.
“Especially for those sponsoring frozen defined benefit plans, there’s an opportunity to restart them and shift from defined contribution info defined benefits,” Wadia says. “But you want to do so mindfully. You want to adopt a benefits design that’s really suitable for the current workforce and suitable for the plan sponsor, in terms of cost sharing and risk sharing.”
PRTs Starting to Slow
Aside from enjoying higher market returns, many companies are taking a wait-and-see approach to pension risk transfers in the face of mixed economic signals and the ongoing uncertainty of the impact of tariffs.
“There were a lot more active conversations happening until April rolled around,” Reddy says. “Since we’ve had ‘Liberation Day,’ lots of organizations have been keeping their powder dry, not just for their pension plans, but for capital expenditures and overall investments because they want some certainty around where they should invest.”
Still, with more insurers entering the PRT market, and many offering competitive pricing, it’s an option that many plan sponsors might reconsider, Clark says. More than 80% of insurers say that they expect a declining number of PRT deals through the end of this year, as well as a lower dollar amount of transactions, according to research from October Three.
“Companies that are taking their liabilities out to bid through the pension risk transfer market are getting pretty favorable pricing this year,” he says. “I think that’s because we’re seeing insurer appetite, and they’re willing to sharpen their pencils a little more because of the competitive landscape that they’re in. It’s fairly favorable for plan sponsors looking to transact in the annuity purchase market.”
The October Three report found that many insurers are expanding their minimum and maximum transaction levels or, for the first time, considering underwriting the obligations owed to pension plan participants who are not yet retired.
Matt McDaniel, U.S. pension strategy and solutions leader at Mercer, says the pullback in the PRT market may also reflect some litigation activity from retiree groups challenging insurers selected for a transaction. That is particularly true among the sponsors or large pension plans that may want to see how such lawsuits shake out before moving forward.
“But the small and medium end of the market continues to chug along pretty steadily,” McDaniel says. “We haven’t seen a lot of litigation for $500 million deals; all the litigation is on those multi-billion, large deals.”
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