Key Calls to Action for 2025
The average pension plan sponsor kicked off 2025 in an improved funding position relative to the beginning of 2024. Plans continue to achieve new record funding levels since the 2008 financial crisis, with the average plan being overfunded. Going into 2025, plan sponsors have a few calls to action driven by trends that have developed in recent periods.
The Pension Roller Funded Status Coaster
While funding levels continued upward during 2024, the sources of the improvements are important when looking forward. For the last two years, equity markets have been a significant contributor to funded ratio improvements, with the S&P 500 index posting returns above 20% in each of those years. Interest rates increased in 2024, which helped reduce pension liabilities. With both equities and rates driving positive impacts to funding levels in the most recent year, plan sponsors may consider the potential paths for 2025 when thinking about investment strategy.
Call to action for return-driven plans
Return-driven plan sponsors with higher allocations to equities or smaller allocations to long duration bonds saw significant upticks in funded ratios over the last few years with rising rates. These types of plans have been encouraged to take risk off and lock in funded ratio improvements as they occurred. While rates have remained elevated, there has been a bit of volatility with some significant drops in certain months. As plans get closer to being well funded or overfunded, plan sponsors are encouraged to reduce risk in portfolios before additional potential pullbacks occur with plan funded levels. Liability driven investment strategies designed to stabilize plan funded ratios have become mainstream and a common practice for managing pension plans.
Elevated Pension Risk Transfer Activity
As funded levels and interest rates remained elevated, so has pension risk transfer activity during the last couple of years. According to LIMRA, annuity buyouts totaled a record level of $36.5B through the third quarter of 2024, while full 2023 results were $41.5B. One of the drivers of the activity has been increasing PBGC (Pension Benefit Guaranty Corporation) premiums. PBGC premiums have more than doubled in the last 10 years and in 2025 reached their highest levels of $106 per plan participant and 5.2% of unfunded liability with a per participant cap.
Call to action for plans paying high PBGC premiums
In recent years, offering bulk lump sums at opportune times has been one technique to reduce participant counts and associated PBGC premiums. While funded statuses and interest rates remain high, plan sponsors with substantial terminated vested populations should consider the implications of offering lump sums. Those containing sizeable retiree populations with smaller benefits should evaluate annuity buyout opportunities for those groups. Discretionary contributions for underfunded plans can further reduce variable rate PBGC premiums. Plans considering partial risk transfers should work with their providers to manage the investment strategy considering a sizable outflow of plan assets and liabilities.
Return of Contribution Requirements
In the last couple of years, as market interest rates have increased, the impact of funding relief allowing smoothing interest rates on liabilities for contribution calculations have diminished. As shown in Figure 1 below where accounting discount rates are marked-to-market and generally used to measure balance sheet liabilities, the funding interest rates used for contributions are now expected to be lower than market rates for the first time in recent history. Depending on asset levels, this could mean lower funded levels on a contribution basis than the marked-to-market funded levels used for accounting purposes. Some plan sponsors started to see this impact contribution requirements starting in 2024.
Figure 1. Sample Discount Rates
As of 12/31/2024. Source: PNC
View accessible version of this chart.
Call to action for underfunded pension plans
If a plan has not recently gone through the exercise of evaluating the various actuarial methods available for contribution calculations and PBGC requirements, now would be a good time to evaluate these methods with the plan actuarial and investment providers. Consider running projections to measure the impact of actuarial method changes. Furthermore, as a plan becomes more de-risked, smoothing out interest rates for liability purposes could cause some unintended consequences for the plan financials. The current environment and de-risking landscape may spur the need for a thorough review of these methodologies.
Figure 1: Sample Discount Rates (view image)
Date |
Accounting |
Funding |
1/1/2020 |
3.01 |
5.67 |
1/1/2021 |
2.23 |
5.52 |
1/1/2022 |
2.63 |
5.34 |
1/1/2023 |
4.95 |
5.17 |
1/1/2024 |
4.76 |
5.04 |
1/1/2025 |
5.17 |
5.44 |
As of 12/31/2024. Source: PNC
