Today, many US corporate defined benefit (DB) plans may have the best opportunity to derisk in the last two-plus years — and we think they might want to consider taking advantage of it given the macro and market uncertainties that loom for the second half of 2024.
We estimate funded ratios have risen a hefty five percentage points year to date to 102% — the highest level of the post-GFC era.1 In contrast, funded positions rose a meager two percentage points in aggregate in 2022 and 2023, from 95% to 97%, leaving many plans’ derisking aspirations on hold.
Meanwhile, open questions related to the policy paths of the Fed and other central banks and the outcome of the US election (read up on our election insights here) may increase the impetus for taking action now. In short, we see a case for higher volatility in both equities and rates, translating into a wider range of potential funded-ratio outcomes. Plan sponsors may want to consider the potential benefits of locking in and protecting some of the year’s hard-fought gains ahead of the back half of the year.
Suggested action steps
- Run a real-time funded-ratio estimate, compare it to the plan’s glidepath triggers (formal or informal), and evaluate whether and how to derisk.
- Evaluate potential derisking strategies:
Credit (long or intermediate) — The focus here is on matching spread exposure in the liability. We think fundamentals and technicals are solid, and therefore spreads may stay tight and rangebound for longer. Corporations have pulled forward new issues year to date ahead of potential election volatility, while all-in yields remain attractive, which has kept demand strong. And while it’s a bit of a circular argument for an Alert suggesting that plans consider taking risk off the table, we think that with funded ratios hovering just above 100%, corporate DB plan derisking and demand from other liability-relative investors could keep long-end spreads tight.
Treasuries and STRIPS — This may help plans manage to hedge-ratio targets and maintain a healthy liquidity buffer for benefit payments, rebalancing, and any capital call needs.
Defensive equities — This may appeal to plans that want to reduce risk but have higher return objectives or that are looking to diversify their return-seeking allocation. In addition, we think valuations are attractive. (Read our recent article on defensive equities.)
Liquid infrastructure — This asset class provides an opportunity to 1) derisk via exposure to companies that may have steadier, more bond-like cash flows and 2) invest in potential growth themes, such as AI-driven demand for data centers and power generation.