Corporate pensions

Marty: Funded ratios for U.S. corporate pension plans improved again in 20241, building on overfunded positions many plans have enjoyed since 2023. Recognizing strong funded positions, we believe clients should “use their well-funded plan to their advantage”, and in some cases to consider “reopening their plan or increase benefits” as a few of the ways to use a surplus. In this years’ U.S. corporate pension themes paper we undertake a comprehensive review of these two methods, and five others – in total seven different uses for a pension surplus.

Lynda: One year beyond IBM’s decision to reopen its $25bn2 overfunded DB plan, there has been much industry speculation about whether other U.S. corporations would follow suit in using a pension surplus to improve benefits for employees. There were a few high-profile examples of workers, particularly those with union populations such as Boeing, becoming more vocal about their desire to receive a traditional defined benefit pension. We think this drumbeat on the potential value of a defined benefit pension, or guaranteed income type benefit, will continue.

Anvesh: A decision to use a surplus by reopening the plan, enhancing benefits, putting the surplus to work for permissible corporate activities, or funding additional benefits beyond the pension (to name a few) may likely results in an increase in the required return to maintain a given funded ratio goal.

If the plan sponsor wanted investment returns to do most of the work to remain overfunded and avoid future contributions, it would likely need to re-risk its asset allocation into growth assets and out of LDI assets or add leverage to maintain hedge. The form of the growth assets also matters too. On the one hand, an all-public market approach across a range of listed asset classes may work to achieve the desired return. Or if liquidity needs were not a concern, the sponsor could conceivably need less of an increase in growth assets by establishing a new diversified private markets program, where returns are potentially greater for a given capital allocation.

Marty: From a sponsor perspective, pension surpluses, particularly for these closed and frozen plans, may lie dormant on corporate balance sheets unless they are used. Each of the seven uses for a pension surplus has the potential to either increase or reduce the footprint of the plan and some may benefit the sponsor as well as the participant. As always, decision-makers should remain aware that the ERISA fiduciary responsibility to focus on preserving benefits for participants remains the ultimate priority when designing strategies for DB plans.

IMPORTANT NOTES

1 Source: BlackRock U.S. LDI Pension MarketWatch, as of November 2024.

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