LDI in 2026: 10 questions corporate plan sponsors are asking

As 2025 came to a close, US corporate defined benefit (DB) plans were generally enjoying funded status improvements, with the average plan 103% funded on an accounting basis as of December 31 — up from 100% at year-end 2024.¹ Stronger funding has many plans preparing for their next derisking threshold, while some are taking a step back to evaluate their surplus goals and investment strategy. Other themes from our recent plan sponsor conversations include diversifying the return-seeking portfolio, investing in intermediate credit and private investment-grade credit, and addressing headwinds from high equity valuations and the downgrade drag inherent in the liability discount rate. And of course there is always interest in the market outlook (read ours for 2026, including thoughts on rates, credit, and other assets).

To help plan sponsors prepare for the coming year, we offer this overview on these and other topics.

1. How are capital market assumptions (CMAs) evolving? What about return on asset (ROA) assumptions?
Our strategic capital market return assumptions, which look out over a 30 – 40-year horizon, are now generally a touch lower for equities than they were in late 2024, while assumed long bond returns are slightly higher. Over an intermediate (10-year) horizon, however, we continue to forecast a negative equity risk premium relative to long-duration bonds, primarily a function of elevated equity valuations competing with yields of about 5% on long-duration bonds.²

This suggests that plans might not be as well compensated for taking equity risk relative to long-duration hedging assets over the intermediate term. This is not a blanket call to abandon equities — these are 10-year assumptions and the path of returns matters — but it may be a reason for plans to: 1) confirm their asset mix aligns with their glidepath and most recent funded ratio, and 2) take a fresh look at opportunities to diversify their return-seeking lineup (see question 2) and seek ways to build more active risk into their investment mix.

Our top ideas for adding more active risk and diversification include equity extension strategies, rotational fixed income, and hedge funds (e.g., net-long, market neutral, or fund of funds). We are also excited about the growth potential from infrastructure assets as power demand accelerates, with public infrastructure benefiting recently from private take-outs at attractive prices — a trend we think will continue.

In terms of corporate plan ROA assumptions, they increased for the second year in a row in 2024, the most recent year reported, with the average assumption at 6.0%.³ We believe they could stabilize from here given the CMA picture we describe above.

Read more on ROAs and our capital market assumptions in our paper, Setting ROAs for 2026: A guide for US corporate and public plans.

2. How should return-seeking allocations be structured? And what role can alternatives play?
Based on recent polls (our own and others in the industry), diversifying return-seeking allocations is a top area of interest. We continue to think that plans should balance upside equity participation with downside mitigation by bringing together three building blocks, which include a variety of alternatives and can, in many cases, be implemented publicly, privately, or both:

• Core global equities for upside participation potential — Examples of implementation options include long-only public equity, private equity, and equity extension (e.g., 140/40) strategies.
• Defensive equities that aim to outperform in down markets while still participating in up markets (e.g., a target 95% upside/85% downside capture ratio) — Our research has shown that outperforming in down markets often drives long-term outperformance, even if not fully capturing upside equity returns, due to the laws of compounding. Implementation examples include income-oriented, high-quality cash compounders; low-volatility approaches; and multi-strategy funds that combine these characteristics, as well as net-long hedge funds.
• Liability-aware diversifiers for more explicit downside protection, such as infrastructure, real estate, return-seeking fixed income, and market-neutral hedge funds (e.g., global macro or relative value) — For plans that remain underhedged against their liability, the implicit bond exposure in many of these asset classes might supplement the hedging portfolio in falling-rate environments. For fully hedged plans, including those at the end-state that are maintaining a small return-seeking allocation, the downside mitigation properties of these approaches may provide some protection in downgrade regimes that threaten funded-ratio stability due to the uninvestability of the discount rate.

We will be sharing new research on return-seeking allocations in 2026. We also offer a closer look at the role of alternatives in both return-seeking and liability-hedging portfolios in our recent paper, Allocating to alternatives: A role-based guide for corporate DB plans.

3. Are the benefits of integrating private investment-grade (IG) credit into a liability-hedging strategy worth the liquidity give-up?
We think that private IG credit could be a potentially low-risk way to chip away at an uninvestable liability headwind. For corporate plans using a AA corporate discount rate, credit migration (or “downgrade drag”) has historically resulted in a roughly 50 bp annualized headwind between a duration-matched hedging portfolio and the liability. Assuming a 75 to 100 bp illiquidity premium, a 10% private IG allocation could offset 7.5 to 10 bps of this headwind with a nominal effect on funded-ratio volatility (while the long-term average liquidity premium for the market is closer to 50 bps, we think managers with the necessary capabilities and experience may be able to target a higher range). Alternatively, a plan could look to equities to make up for the downgrade drag, but that increases funded-ratio risk. In contrast, private IG credit — because it is, in effect, an extension of the public market — may have a relatively neutral effect on projected funded-ratio volatility.

We’d also add that a typical liability profile — even for a more mature frozen plan — is expected to pay out 40% or more of its liability more than 10 years out from now. This can make plans a natural liquidity provider, a position they may want to take advantage of.

Read a deep dive on the private IG market for more information.

4. Should return-seeking fixed income be part of the return-seeking or liability-hedging allocation?
Return-seeking fixed income includes spread sectors such as high yield, emerging markets debt, and bank loans; middle market direct-lending-focused private credit; and multi-strategy approaches such as multi-sector credit and opportunistic fixed income strategies that have wider berth to rotate across sectors or invest in niche areas of fixed income.

Under a purist approach, return-seeking fixed income would live in the return-seeking bucket, with the liability-hedging portfolio composed exclusively of investment-grade, domestically listed corporate and government debt. Anecdotally, we would say that most plans have taken this approach to date.

We have observed, however, some plans reclassifying return-seeking fixed income into the liability-hedging portfolio and we think it warrants consideration. If sized appropriately, the allocation may add only modest incremental tracking risk while introducing additional return potential from the underlying spread-sector beta exposure and/or active management, particularly in multi-strategy approaches. In particular, rotational approaches that have flexibility to move in and out of credit markets might be a means of offsetting downgrade-related risk associated with the uninvestable nature of the liability (if skillfully deployed), while also being poised to take advantage of return opportunities from credit pricing dislocations.

7. What are the different paths that plans might take for surplus asset investing?
Our discussions with plans focus on three possible paths:

• Path 1: Hibernate the plan with a traditional approach tied to a specific funded status and asset mix — Plans may choose hibernation because they don’t anticipate a use for surplus assets. For frozen plans, hibernation could offer an alternative to a buyout or help make them “buyout ready” for the future. We believe a hibernation investment framework should be focused on selecting a target funded ratio with a modest surplus cushion and using a low-funded-ratio risk portfolio that employs various tools to offset the uninvestability inherent in the discount rate.
• Path 2: Maximize surplus while mitigating the risk of future deficits — This path might appeal to plans that have one or more permissible use cases for surplus assets. In addition, pending legislation in the US and the UK that would allow plans more flexibility to transfer surplus DB plan assets to a defined contribution (DC) plan could make this path more attractive. We advocate for an investment framework borrowed from the insurance company playbook, splitting assets into a low risk “liability reserve” and a total-return focused “surplus portfolio.”
• Path 3: Fund future benefit accruals by seeking a target surplus return to cover service costs or other needs — This option is most relevant to plans that are open or newly closed, or frozen plans that include qualified plan expenses in service cost, and that view the use of surplus for other purposes as a secondary objective or not an objective at all. A key for plan sponsors is to decide whether service cost should be funded from returns on surplus assets or from the surplus itself, as this will guide the investment strategy.

Watch for our upcoming paper offering a closer look at these investment frameworks.

8. How should plan sponsors evaluate the potential uses of surplus in the context of a pension risk transfer (PRT) decision?
We think the key is focusing on the potential benefits of maintaining the optionality to use surplus assets for future cost and cash outlay savings. That could mean, for example, replacing some or all of an existing DC retirement benefit with a reopening of a frozen DB plan funded from the surplus, thereby achieving a cash outlay savings; monetizing the surplus in an M&A transaction; implementing an early retirement window for workforce management purposes; or funding retiree medical benefits. More flexibility to transfer surplus assets to a DC plan, if ultimately allowed under pending legislation, would introduce a new avenue of potential cost savings.

Importantly, plan sponsors do not need to decide today what to do with surplus assets. The benefit is in maintaining the optionality to use it in the future, which may become increasingly valuable if or as the retirement landscape evolves through legislation, plan design innovation, and employees’ desire for guaranteed lifetime income against the backdrop of heavier reliance on DC plans and the expected 2033 depletion of the Social Security Old-Age and Survivors Insurance Trust Fund.⁵

In the meantime, simple but effective hedging strategies may help limit the risk of deficits and future contributions in the DB plan, thereby incurring little “cost” to maintain this optionality — versus the explicit insurer premium and excise tax costs associated with a pension risk transfer.

Read more in our article, Why more corporate plans should pass on pension risk transfers.

9. Why is unfunded duration so costly and what can be done about it?
Unfunded duration involves using interest-rate futures, repurchase agreements (repos), swaps, and other synthetic tools to increase duration in a portfolio rather than purchasing cash bonds. It can be a capital-efficient means of reducing interest-rate risk — and therefore overall funded-ratio volatility — while maintaining capital for return-seeking goals. However, the cost of adding duration synthetically, and through swaps and futures in particular, has been on a rising trajectory since the global financial crisis — primarily due to fixed income markets getting larger and dealer balance sheets failing to keep up given both regulatory and capital constraints.

Given these costs, as well as liquidity and basis risk considerations, our LDI Team generally thinks plans should consider prioritizing physical bonds in matching their liabilities and conduct a cost/benefit analysis to determine how much to extend the hedge ratio synthetically. In discussing completion management with clients, we typically recommend that they consider the combination of US Treasuries, STRIPS, and synthetic instruments that can achieve the best balance between meeting their hedge-ratio goals and managing these costs and risks.

That said, there have been several developments that could meaningfully improve the cost of unfunded duration moving forward, including the growth of centrally cleared repo, the rise of peer-to-peer non-bank trading, and easier capital treatment rules for banks that will be implemented in 2026 (e.g., changes to the Supplementary Leverage Ratio). For more on this topic, read our article, The high cost of unfunded duration — and some hope on the horizon.

10. What are some of the implementation considerations for using an interest-rate overlay to increase a plan’s hedge ratio?
We think plans considering an interest-rate overlay should have the following topics and questions on their implementation checklist:

• Risk management — How does the manager source collateral for variance margin (within the portfolio or does the manager request a transfer of additional capital)? What are the different layers in the liquidity waterfall (e.g., cash, short-term Treasuries, Treasuries, STRIPS)? How much tracking risk is acceptable? How many counterparties are available?
• Design — What instruments are allowable in the portfolio (e.g., Treasury futures, swaps, repo, total return swaps, interest-rate options, physical bonds)?
• Portfolio management — How does the manager aim to cost-effectively source duration? What is the security/instrument selection process?
• Partnership and communication — What information does the overlay manager need to determine the duration profile of the interest-rate overlay and what processes will they establish to obtain this information?
• Benchmarking — How is the interest-rate overlay benchmarked (e.g., against a levered physical bond portfolio, a representative blend of physical bond and derivative indices, or itself)? What reporting does the manager provide to demonstrate hedge-ratio targets are met?
• Fees —What safeguards are in place to ensure unbiased derisking advice from the manager?

¹Based on estimated changes in yields and asset returns since reported funded ratios and discount rates at year-end 2024. Year-end data based on year-end 10-K filings of Russell 3000 companies in each given year with a December fiscal year end. 2025 estimate based on funded-ratio and discount rates estimated by Wellington Management based on change in high-quality corporate bond yields (blend of Bloomberg US Long Corporate Aa and Bloomberg US Intermediate Corporate Aa) since 31 December 2024 and performance of equities (MSCI ACWI), fixed income (blend of Bloomberg US Long Corporate, Bloomberg US Long Treasury, and Bloomberg US STRIPS 20+ yr), other investments (blend of HFRI Fund Weighted Composite Index, MSCI ACWI * 0.5 beta, ICE BofA US 3-Month T-Bill, Bloomberg US Corporate High Yield, and Bloomberg US Leveraged Loans), and real estate (NCREIF Property Index). Actual results may differ significantly from estimates. Results presented at the aggregate Russell 3000 Index level. Sources: FactSet, Wellington Management. | ²Yield to worst on Bloomberg US Long Government/Credit Index of 5.06% as of 30 November 2025 | ³Sources: FactSet, Wellington Management. Based on year-end 10-K filings of companies in the Russell 3000 Index in each given year. For illustrative purposes only. | ⁴Based on analysis of 1 to 10 year returns from eVestment US Intermediate Duration - Credit Fixed Income and US Long Duration - Credit Fixed Income as of 30 June 2025. For illustrative purposes only. Past performance does not guarantee future results. | ⁵“Status of the Social Security and Medicare Programs,” US Social Security Administration

Not actuarial or legal advice. Refer to actuary and counsel for advice specific to your plan.

Important disclosures: Capital market assumptions
Intermediate capital market assumptions reflect a period of approximately 10 years. Strategic capital market assumptions reflect a period of approximately 30 – 40 years. If we developed expectations for different time periods, results shown would differ, perhaps significantly. Additionally, assumed annualized performance and results shown do not represent assumed performance for shorter periods (such as the one-year period) within the longer period, nor do they reflect our views of what we think may happen in other time periods. The annualized return represents our cumulative performance expectations annualized. The assumed returns shown do not reflect the potential for fluctuations and periods of negative performance.

This analysis is provided for illustrative purposes only. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares, strategies, or other securities. References to future returns are not promises or even estimates of actual returns a client may achieve. This material relies on assumptions that are based on historical performance and our expectations of the future. These return assumptions are forward-looking, hypothetical, and are not representative of any actual portfolio, or the results that an actual portfolio may achieve. Note that asset-class assumptions are market or beta only (i.e., they ignore the impact of active management, transaction costs, management fees, etc.).

The expectations of future outcomes are based on subjective inputs (i.e., strategist/analyst judgment) and are subject to change without notice. As such, this analysis is subject to numerous limitations and biases and the use of alternative assumptions would yield different results. Expected return estimates are subject to uncertainty and error. Future occurrences and results will differ, perhaps significantly, from those reflected in the assumptions. ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY AND AN INVESTMENT CAN LOSE VALUE. Indices are unmanaged and used for illustrative purposes only. Investments cannot be made directly into an index.

This analysis does not consider transaction costs, management fees, or other expenses. It also does not consider liquidity (unless otherwise stated), or the impact associated with actual trading. These elements, among others, associated with actual investing would impact the assumed returns and risks, and results would likely be lower (returns) and higher (risk).