Shifting to a mindset of surplus

A long trip before a new journey

Following the passage of the Employee Retirement Income Security Act (ERISA) in 1974, defined benefit corporate pensions have been on a long journey to meet the promises made to employees. Corporations have had to navigate significant market complexity – the Dot Com Bubble, Global Financial Crisis, COVID Pandemic, and decades of persistently low interest rates and increasing costs (e.g., PBGC premia) – which progressively made DB plans less attractive.

Sponsors have been closing and freezing their DB plans (reducing or eliminating benefit accruals) at a steady rate over the past 20 years, and many struggled to reach “full funding” where they have enough assets to meet obligations.¹

From deficits to surpluses

Circumstances for DB plans changed in 2022 as rising rates, contributions, and asset performance drove the average US corporate DB pension plan to reach a funded level of above 100%.² This improvement continued in 2023, and PBO funded ratios are now at their highest level in 15 years.³ As we discussed in our 2024 Corporate Pension Themes, this is spurring corporations to revisit their future aspirations for their DB plans in light of new market conditions, labor force preferences, and their own unique needs.

Our provocative title “Re-open the plan” coincided with IBM’s recent decision to unfreeze the company’s $25.1bn⁴ overfunded DB plan and leverage its $3.6bn surplus to replace a 401(k) benefit with a defined benefit. This is only one way to potentially use a surplus.

Ways to use a pension surplus

The following table briefly summarizes the different ways sponsors may use a pension surplus and the potential benefit and investment implications of each:

A better hedge is likely relevant on any route

These are only a handful of ways that corporate DB sponsors can consider the transition from a deficit environment to one characterized by surplus. Each decision will reflect the unique needs of a plan sponsor, but every decision merits revisiting the liability hedge. Rising funded statuses, structurally higher rates, and an inverted/flat yield curve are catalysts for most plans to reevaluate their hedge programs, preserve funded status, and we introduce better risk control regardless of the path they choose.

Consider this an opportunity

A new backdrop – the highest funding levels since the Global Financial Crisis, with many plans at or approaching “fully funded” alongside structurally higher interest rates – means corporate defined benefit plan sponsors face new options to address their goals, and even consider new objectives. From improvements in liability management to benefit design and optimization, we continue to hear new questions every day, all as large corporate sponsors continue to make headlines. Working with a strategic partner can help plan sponsors understand the full implications of a pension surplus and take action, and BlackRock’s deep team of professionals is here to share our insights.