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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
We recently updated our analysis of the funded status, derisking activity, and ROA assumptions of US corporate defined benefit plans using 2024 fiscal year-end filings for companies in the Russell 3000 Index. Below we share our key observations on the data and on our outlook for plan contributions. In addition, we offer a few quick thoughts on next steps for derisking plans.
Plans ended 2024 with an aggregate funded ratio of about 100%, up three percentage points from year-end 2023, driven by strong equity returns and higher discount rates (Figure 1). More than 40% of plans were in surplus as of year-end 2024, although that proportion is likely somewhat lower today.
As of April 25 of this year, we estimate funded ratios have fallen two percentage points in aggregate to 98%, giving back most of their 2024 gains. That said, funded ratios have been fluctuating quite meaningfully and may continue to do so amid the ongoing market volatility.
Figure 1
Pension allocations were unchanged at year-end 2024 compared to year-end 2023. Anecdotally, we saw examples of both derisking and rerisking activity in 2024.
Despite the recent rise in long-term yields, we expect derisking activity may continue to be muted in 2025 unless equity markets rebound and support funded-ratio growth. With the recent sell-off, plans are further away from their next funded-ratio derisking trigger and some plans may defer rebalancing to see if funded ratios will rebound pending further policy developments. That said, reactions among plans may vary and some plans concerned about higher recession odds may accelerate derisking to prevent further funded-ratio losses. Short-term rebounds could also spur activity if plans see this as a second chance to derisk and protect funded ratios in an uncertain environment.
One of our key corporate DB recommendations is to review current funded-ratio estimates against glidepaths to see if a derisking trigger has been hit, especially in light of our capital market assumptions, which forecast that equities will modestly underperform long bonds over the next 10 years (See Flipping the script: Our updated market outlook and the derisking/rerisking decision for more information).
We’ve recently observed interest among some plans in building a more diversified return-seeking allocation as a way to reduce risk. In liability-hedging allocations, interest in intermediate credit and investment-grade private placements also remains strong. Figure 2 offers a snapshot of plan allocations.
Figure 2
The average ROA assumption increased to 6.0% in 2024 from 5.8% in 2023 (Figure 3). This is on the back of a 70 basis point increase in 2023, which reversed a 15-year downward trend and was primarily the result of higher capital market assumptions.
We believe ROA assumptions could modestly decline in 2025, reflecting lower capital market assumptions we saw in late 2024.
Figure 3
Last year was the lowest contribution year over the 2007 – 2024 period (Figure 4). Contribution levels have been low over the last few years, but a combination of negative equity returns and higher rates could lead to higher mandatory contributions for many companies. This is a low risk for 2025 – 2026 given time lags in funding rules but is something we are watching for 2027 – 2028.
Figure 4
1Note our prior estimate of the aggregate year-end 2024 funded ratio was 105%, based on rolling forward year-end 2023 financials. Most of the difference is due to (1) realized asset returns below expectations and (2) discount rates coming in lower than we estimated. For the asset returns, a large part of the difference is likely a result of challenges with estimating returns for the 21% of pension assets invested in “other” (alternative) assets and lack of transparency on fixed income duration (53% of assets). For discount rates, many companies use consultant curves that select the discount rate from a smaller, higher-yielding subset of the Aa universe, making these rates less predictable. In response to this, we have revised our methodology to reflect a more diversified alternatives portfolio and longer fixed income duration than what we had previously proxied. Additionally, the estimated discount rate methodology has been revised to reflect a proxy for consultant “above median” curves.
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