Over the past decade, corporate defined benefit (DB) pension plans have undergone significant regulatory reforms and dramatic shifts in investment conditions. Once burdened by rising liabilities that offset asset gains, today’s plans benefit from improved funded statuses driven by rising discount rates and strong equity markets. However, many plan sponsors have yet to recalibrate their management strategies, exposing themselves to unnecessary risks and missed opportunities. Sponsors need to reassess strategic priorities and adjust their investment approaches to stay on track.

Navigating New Market Dynamics

Rapid rate hikes, prolonged yield curve inversions, and improved funding relief measures such as MAP-21 and ARPA shape the current environment. These factors have stabilized contribution requirements and improved funded statuses for many plans, especially those previously underfunded or underhedged. While these developments offer stability and opportunity, they demand a rethink of traditional pension management strategies to align with long-term goals.

Strategic Growth Through Diversified Assets

Growth assets remain essential for pension plans, even in a high-interest-rate environment. These investments help offset costs, address demographic changes, and mitigate risks from market volatility or actuarial adjustments. Diversification strategies—such as private credit, high-yield fixed income, and private equity—can provide downside protection and generate superior returns. Private credit, in particular, offers the advantage of floating-rate structures and higher yields, making it valuable in a rising-rate scenario.

Validating liquidity needs is equally critical. Plans with excess liquidity can optimize their portfolios by reallocating toward higher-return private equity investments, ensuring they’re well-positioned to endure market stress while maximizing growth potential.

Reassessing Liability Hedging Strategies

As funded statuses improve, plan sponsors must rethink their liability-hedging strategies. Advances in hedging instruments now allow for better risk management with fewer resources. Non-traditional tools such as intermediate credit, commercial mortgage loans, and securitized assets can enhance yield, reduce volatility, and offset liability costs. Balancing liability-driven investments (LDI) with growth-focused strategies ensures plans remain efficient and adaptive to evolving conditions.

Overhedging can be counterproductive, reducing overall portfolio returns and locking plans into lower-yielding investments. Instead, a more balanced approach—focusing on achieving long-term outcomes rather than minimizing short-term risks—can provide better results.

Optimizing Contributions

Regulatory changes have eased the volatility of contribution requirements, allowing sponsors to focus on strategic funding decisions. With stabilized interest rates used to calculate minimum contributions, plans now have greater predictability and flexibility in capital allocation. Aligning funding targets with accounting methodologies, such as adopting the Full Yield Curve approach, can reduce contribution volatility and enhance cost efficiency.

Strategic Benefit Management

Well-managed DB plans can transform from financial burdens to corporate assets, supporting broader organizational goals. Supported by regulatory reforms and innovative strategies, effective benefit management allows plans to reduce costs while improving employee retention and enterprise value. For plans nearing termination, options such as lump sum payments or pension risk transfers (PRTs) require careful consideration to avoid unnecessary costs or funding shortfalls.

For those pursuing long-term viability, achieving a surplus position is critical. A surplus allows greater flexibility in pursuing growth strategies, supporting mergers and acquisitions, or funding retiree benefits. By adjusting glidepath designs and increasing allocations to growth assets, plans can achieve surplus positions while mitigating the risk of underfunding.

Adapting for Long-Term Success

The improved funded statuses of today’s DB plans present a rare opportunity to recalibrate strategies and embrace new market realities. While the core levers of pension management—asset returns, liability hedges, contribution policies, and benefit management—remain unchanged, their operation must evolve to align with modern conditions.

By adopting a forward-thinking approach, plan sponsors can capitalize on favorable regulatory and market changes to enhance their plans’ financial health, reduce risks, and achieve sustainable growth. Adaptability and informed decision-making are essential to ensuring that DB plans remain valuable assets for organizations and their employees.