By: Russ Kamp, Managing Director, Ryan ALM, Inc.

I recently reported on Milliman’s Corporate Pension Plan Index that indicated aggregate funding for the top 100 plans had settled at 102% at the end of November. Today, P&I ran a report form Willis Towers Watson (WTW), that suggested that the aggregate funding for 358 of the Fortune 1000 companies with a defined benefit plan had reached 100%, up 2% since the end of 2022. Both reports are highlighting considerable strength for Corporate America’s pension funding. Great!

Now what?

After a great 2021, we asked not only what Corporate America would do regarding their pension systems, but pension plans in general including public and multiemployer. Unfortunately, they didn’t do much and the Fed’s aggressive interest rate moves beginning in March 2022 created a lot of angst and uncertainty for sponsors and large drawdowns in asset values. The rising rates led to a significant reduction in the present value of those future benefit payments or the funding situation would have been much worse.

Well, 2023 was a surprisingly good year for pension plans from both an asset and liability standpoint. Will plan sponsors and their advisors work to protect the gains or will they once again allow the markets to dictate the funded status? We believe that a defined benefit plan is superior to a defined contribution plan. We believe that they act as great recruiting and retention tools. As a result, DB plans need to be protected and preserved. SECURING the promised benefits at a reasonable cost and with prudent risk should be the goal. Chasing a return through a traditional asset allocation only leads to excessive volatility in contributions and funded status.

US interest rates are still at very attractive levels. Take advantage of this environment to secure the promised benefits through a defeasement strategy. Use your current bond allocation to match bond cash flows with liability cash flows (benefits and expenses) chronologically as far into the future as the allocation will permit. Your fund will now have the necessary liquidity to meet your monthly needs, while buying time (extending the investing horizon) for the plan’s alpha assets to grow unencumbered.