Three Trends in Corporate Pension Plans

Corporate plans are looking to reduce risk and manage operational complexity.

Corporate pension plans have benefited from strong equity returns and relatively high interest rates in recent years. This unusually beneficial market environment has contributed to extremely strong funded ratios across the corporate pension universe. As of October 2024, the top 100 US corporate pension plans were more than 103% funded.¹

Pension plans can’t rely on these conditions to last. The Federal Reserve has cut rates twice in recent months and is signaling more cuts in the near term. And while the outlook for equities is generally positive, a variety of economic and geopolitical uncertainties loom.

Corporate plan sponsors need to think carefully about how to navigate this new, dynamic environment. Many are taking proactive steps to protect funding improvements and more efficiently align their assets with their liabilities to mitigate funded status volatility.

Here are three key trends we’re watching among corporate defined benefit plans:

Trend: De-Risking

As corporate plans have achieved full funding, many have looked to incrementally take risk off the table. Corporate pension plans are employing a range of de-risking approaches, including enhancements to their liability-driven investing (LDI) solutions, reduced equity allocations, and equity volatility management.

LDI strategies continue to play a key role in de-risking. But corporate pension plans increasingly are seeking more tailored, scalable, and precise LDI solutions, particularly those that can help reduce interest rate risk and curve risk while delivering enough return to cover liability growth and expenses. Some are employing exposures to asset classes outside of traditional liability-managed-strategies in investment-grade-credit and US Treasuries, to include high yield, emerging markets debt, and leveraged loans.

Trend: Transferring Pension Risk

Pension risk transfer (PRT) effectively moves risks related to meeting plan liabilities from the corporate pension plan to an insurer. PRT volumes in 2022 and 2023 were the highest in decades, with a combined $96 billion in liabilities transferred by pension plans.²

The rise in risk transfer volumes has been spurred in part by continued increases in Pension Benefit Guaranty Corp. (PBGC) premiums. Flat-rate participant premiums have risen by nearly 20% since 2020, and they are expected to move higher in 2025.

Executing a successful pension risk transfer requires careful planning that takes into account factors such as portfolio evaluation, asset transition, and participant communication. A strategic approach to this process can help corporate pension plans minimize fiduciary and financial risks as part of a broader de-risking strategy.

Trend: Employing Total Portfolio Solutions

While Corporate pension funding continues to improve, increased focus is being placed on exposures to alternatives and private market investments. While open/active plans may continue to commit capital to private markets and alternatives, pension plan investment staff considering an exit strategy in the not too distant future have to manage greater operational complexity and liquidity requirements.

Corporate plans increasingly navigate this challenge by employing third-party advisors. For example, a plan may delegate management of a portion of its portfolio, such as alternative investments or derivative overlays, to an outside advisor and liquidity manager, or outsource management of the plan’s dynamic de-risking-driven trading and rebalancing process.

Plans may also choose a more complete approach that outsources the chief investment officer function. An outsourced CIO can be given a full mandate to manage, trade, select investment managers, and govern a total plan, providing discretionary investment advisory services, customized plan management,  LDI portfolio construction and oversight, and other plan fiduciary services.

For more information about corporate pension plan trends and solutions, contact State Street Global Advisors.