As 2024 unfolds, U.S. corporate pension plans find themselves at a historic crossroads, with funding levels for many surpassing 100% for the first time since before the Global Financial Crisis, marking a significant shift from years of persistent underfunding to a newfound era of potential stability. This milestone, driven by favorable economic conditions such as rising interest rates and strong equity market performance, reflects a remarkable turnaround for defined benefit plans. Yet, beneath this achievement lies a complex landscape of challenges and disparities. While nearly half of the top plans enjoy full funding, a notable portion still languishes below 90% funded status, exposing a widening gap between leaders and laggards. Chief Investment Officers (CIOs) now face the daunting task of not just preserving these hard-earned gains but also navigating uncharted risks in a rapidly evolving financial environment.
The journey ahead demands a careful balance between maintaining stability and pursuing innovation, especially as liability durations shorten due to plan closures and freezes, and traditional investment strategies show diminishing returns. The need for adaptive approaches has never been more pressing in this evolving landscape. This article explores the current state of corporate pension plans, delving into the factors behind their improved funding, the strategic shifts reshaping portfolio management, and the emerging risks threatening long-term resilience. The focus remains on identifying actionable pathways to sustain this progress amidst persistent uncertainties.
Assessing the Current Landscape
Remarkable Funding Progress
In 2024, the funded status of U.S. corporate pension plans has reached an unprecedented benchmark, with the average funding level of the top 250 plans exceeding 100%, a feat not seen in over a decade and a half. This achievement stems from a combination of macroeconomic tailwinds, including elevated interest rates that have reduced the present value of liabilities, alongside robust equity market returns that have bolstered asset growth. Disciplined liability management practices have further contributed to this success, enabling many plans to move from chronic deficits to surplus positions. Notably, the proportion of fully funded plans has surged, with nearly half achieving this status, a sharp contrast to just a few years ago when underfunding was the norm. This progress signals a pivotal moment for the industry, shifting the focus from mere recovery to long-term sustainability.
Despite this overall improvement, the benefits are not universally shared across all plans, revealing a significant disparity that persists in the pension landscape. Approximately 26% of plans are still operating below a 90% funded status, highlighting the uneven impact of favorable economic conditions. Some plans have capitalized on strategic asset allocation and risk management to leap ahead, while others grapple with structural challenges or less effective governance. This growing divide between high-performing and struggling plans underscores the complexity of the pension landscape, where macro tailwinds alone cannot guarantee success. It also raises critical questions about the factors driving such varied outcomes and the steps needed to bridge this gap.
Widening Performance Gap
The dispersion in funding outcomes among U.S. corporate pension plans in 2024 paints a stark picture of inequality within the sector. While the top performers have leveraged rising rates and market gains to achieve or exceed full funding, a substantial minority remains stuck in underfunded territory, unable to close the gap. This discrepancy often ties back to differences in strategic execution, with leading plans adopting proactive de-risking measures and lagging ones hindered by outdated approaches or insufficient resources. The result is a pension ecosystem where the distance between the 75th and 25th percentiles of funded status has widened, creating distinct tiers of performance that challenge industry-wide assumptions about recovery.
Addressing this performance gap requires a deeper understanding of the root causes behind underfunding in certain plans, which can significantly impact their stability. Factors such as legacy liabilities, inadequate contribution policies, or exposure to volatile asset classes can weigh heavily on funding levels, even in a supportive economic climate. For these struggling plans, the path forward involves not just catching up to macro trends but also overhauling internal strategies to align with best practices seen in top-tier plans. Tailored interventions, such as revisiting contribution schedules or rethinking risk exposure, become essential to prevent further divergence and ensure that the benefits of improved market conditions reach a broader swath of the pension community.
Portfolio Management Evolution
Shift Toward De-Risking
A defining trend in 2024 for U.S. corporate pension plans is the pronounced shift toward de-risking, primarily through the adoption of liability-driven investing (LDI) frameworks. Over the past two decades, median fixed income allocations have climbed significantly, reaching an average of 55%, up from a much lower base of 30%. Concurrently, exposure to public equities has plummeted from 64% to just 24%, reflecting a deliberate move away from volatile growth assets toward more stable, liability-matching investments. This reallocation is especially evident among well-funded plans nearing their end-state targets, where fixed income often comprises 60-70% of the portfolio, prioritizing stability over aggressive returns.
This de-risking trend is not merely a reaction to past volatility but a strategic response to the maturing nature of pension obligations. As plans achieve higher funding levels, the imperative to protect gains against market downturns or interest rate fluctuations grows stronger, making it essential to adopt prudent strategies. LDI strategies enable a closer alignment between assets and liabilities, reducing the risk of funded status erosion during economic turbulence. However, this shift also introduces new considerations, such as the potential for lower overall returns in a portfolio heavily weighted toward fixed income. Balancing the need for safety with the necessity of generating sufficient growth remains a critical challenge for CIOs navigating this transition.
Growing Role of Alternative Assets
Alongside the pivot to fixed income, alternative investments have carved out a significant space in pension portfolios, now accounting for roughly 21% of total assets in 2024. This growing allocation reflects a broader recognition that traditional asset classes alone may not suffice to meet both growth and stability objectives. Alternatives, ranging from real estate to private equity, offer the dual promise of diversified returns and reduced correlation with conventional markets, making them an attractive option for plans seeking to mitigate risk without entirely sacrificing upside potential. This trend signals a maturing approach to portfolio construction, where diversification becomes a key pillar of risk management.
The rise of alternatives also speaks to the evolving priorities of pension plans as they stabilize their funding, reflecting a broader trend in financial strategy. For many, especially those with surplus status, the focus has shifted toward fine-tuning portfolios to address specific risks or liability profiles. Alternative assets provide a means to achieve this customization, offering unique return streams that can complement traditional holdings. Yet, integrating these assets requires careful consideration of liquidity constraints and higher management costs, which can pose hurdles for some plans. Striking the right balance between innovation and operational feasibility is essential to ensure that the adoption of alternatives enhances rather than complicates long-term objectives.
Changing Liability Structures
Impact of Plan Closures
One of the most transformative dynamics affecting U.S. corporate pension plans in 2024 is the structural shift in liabilities driven by widespread plan closures and freezes. Median accrual rates have dropped dramatically over the past two decades, falling nearly 60% since earlier benchmarks, with many plans now reporting rates below 1%. This decline, fueled by fewer new entrants and curtailed benefit accruals, has led to significantly shorter liability durations. As a result, plans are less sensitive to interest rate changes, accelerating their progression toward end-state portfolios where stability takes precedence over growth-oriented strategies.
This shortening of liability horizons fundamentally alters the strategic calculus for CIOs. With obligations becoming more immediate, the focus shifts to ensuring that assets are positioned to meet near-term payouts rather than hedging against long-dated risks. While this can simplify certain aspects of portfolio management, it also heightens the urgency of maintaining sufficient liquidity and return buffers to cover benefits as they come due. The trend toward plan closures, while reducing future liability growth, places added pressure on existing resources, compelling plans to rethink traditional approaches to asset allocation and risk mitigation in this compressed timeframe.
Effect of Discount Rate Trends
Higher discount rates in 2024 have further reshaped the liability landscape for corporate pension plans by lowering the present value of long-term obligations. This shift has provided a measure of relief, as it reduces the funding burden associated with distant payouts, contributing to the improved funded status seen across many plans. However, it also necessitates adjustments in how portfolios are structured, as the reduced sensitivity to rate changes diminishes the effectiveness of certain hedging strategies that rely on long-duration bonds to match liabilities. Plans must now recalibrate their approaches to align with this new reality.
The impact of elevated discount rates extends beyond mere accounting benefits, influencing broader strategic decisions. For plans with shorter liability durations, the decreased value of future obligations can create opportunities to reallocate assets toward investments with higher return potential, albeit with careful risk considerations. Yet, this environment also underscores the need for precision in matching assets to liabilities, as missteps could erode the funding gains achieved. Adapting to these conditions requires a nuanced understanding of how discount rate trends interact with other economic variables, ensuring that portfolio adjustments remain aligned with the ultimate goal of meeting benefit commitments.
Emerging Risks and Limitations
Constraints of Fixed Income Strategies
While fixed income has been a cornerstone of de-risking efforts for U.S. corporate pension plans, its effectiveness wanes at higher allocation levels in 2024, particularly beyond a threshold of 70%. At this point, the marginal benefits of volatility reduction and surplus growth diminish, leaving plans with portfolios that may be overly conservative relative to their return needs. This limitation exposes a critical inefficiency in relying solely on traditional bonds for liability hedging, as the reduced upside potential can hinder the ability to build or maintain a funding buffer against unexpected shocks, prompting a reevaluation of asset mix.
The constraints of fixed income are especially pronounced for plans that have already achieved full funding or surplus status, and for these entities, the challenge lies in sustaining gains without sacrificing the stability that fixed income provides. Over-reliance on this asset class risks creating a portfolio that is ill-equipped to handle inflation pressures or generate the incremental returns needed to offset operational costs and benefit payouts. As a result, there is a pressing need to explore complementary strategies that can enhance portfolio efficiency while preserving the protective qualities of fixed income, ensuring a more balanced approach to risk management.
Persistent Unhedgeable Risks
Unhedgeable risks continue to pose significant challenges for corporate pension plans in 2024, threatening the stability of even well-funded portfolios. Downgrade drag in corporate bonds, estimated to cost between 50 and 100 basis points annually, erodes returns as credit ratings slip. Additionally, basis risk arising from duration mismatches between assets and liabilities introduces volatility in funded status, while longevity risk—stemming from retirees living longer than anticipated—adds uncertainty to payout projections. These factors collectively create headwinds that cannot be fully mitigated through traditional hedging mechanisms.
Addressing unhedgeable risks requires building a robust return buffer to absorb potential losses and maintain funding levels during adverse conditions. Plans must prioritize strategies that provide resilience against these unpredictable elements, such as diversifying income sources or incorporating assets with stable cash flows. The complexity of these risks also highlights the importance of ongoing monitoring and stress testing to anticipate scenarios where funded status could be jeopardized. Without proactive measures, even the most carefully constructed portfolios remain vulnerable to these persistent threats, underscoring the need for innovative solutions beyond conventional approaches.
Forward-Looking Strategies
Exploring Alternative Fixed Income
As traditional fixed income reaches its limits, alternative fixed income strategies are gaining prominence in 2024 as a means to enhance portfolio diversification and yield for U.S. corporate pension plans. Asset-based finance (ABF) stands out with its ability to deliver stable cash flows and returns of 100 to 150 basis points above investment-grade (IG) benchmarks, offering a compelling option for downside protection. Similarly, private IG credit provides customizable structures with incremental spreads of 100 to 250 basis points over public benchmarks, aligning closely with liability-driven objectives while maintaining high credit quality.
These alternative strategies are particularly valuable for plans seeking to balance de-risking with the need for return generation. Unlike traditional bonds, which often correlate strongly with market movements, ABF and private credit offer reduced sensitivity to broader economic swings, providing a buffer against volatility. This characteristic makes them suitable for plans at various stages of their funding journey, from those still climbing toward full funding to those in surplus looking to lock in gains. Embracing these tools requires a nuanced approach to integration, ensuring that they complement existing allocations without introducing undue complexity or liquidity strain.
Leveraging Direct Lending and Credit Options
Direct lending and leveraged credit are also emerging as viable components of the pension portfolio toolkit in 2024, catering to diverse needs across funding levels. Direct lending offers equity-like returns with lower volatility, making it an attractive choice for underfunded plans that require growth to close funding gaps. On the other hand, leveraged credit serves as a liquid, intermediate-risk option for income generation, appealing to plans that need flexibility while maintaining a conservative posture. Together, these strategies provide a spectrum of risk-return profiles to address specific portfolio gaps.
The adoption of direct lending and leveraged credit reflects a broader trend toward flexibility in fixed income allocations. For plans with surplus funding, these options can enhance yield without significantly increasing risk exposure, while underfunded plans benefit from the potential for higher returns to accelerate funding progress. However, their implementation must be carefully managed to avoid overextending into illiquid or high-risk territories that could disrupt operational stability. Striking this balance is key to harnessing the benefits of these credit strategies while aligning with the overarching goal of long-term resilience.
Prioritizing Customization and Liquidity
Customization in portfolio construction has become a non-negotiable priority for U.S. corporate pension plans in 2024, given the wide variation in funding status, liability profiles, and risk appetites. Tailored strategies ensure that asset allocations are precisely aligned with a plan’s unique glide path, whether it involves aggressive growth for underfunded plans or conservative preservation for those in surplus. A critical aspect of this customization is maintaining liquidity, with plans often targeting over 70% liquid assets to meet benefit obligations without disruption, while limiting reductions in liquidity to minimal levels to avoid adverse accounting impacts.
The emphasis on liquidity underscores the practical constraints that accompany innovative portfolio strategies. Even as plans explore alternative investments or adjust allocations, the ability to access cash for payouts or unexpected needs remains paramount. Customized approaches must therefore integrate liquidity considerations into every decision, balancing the pursuit of higher returns or diversified risk with the fundamental requirement of operational flexibility. This dual focus ensures that plans can adapt to changing conditions without compromising their ability to fulfill commitments, paving the way for sustainable success in a complex financial landscape.
Building Resilience for the Future
Adapting to a New Financial Era
Looking back on 2024, U.S. corporate pension plans navigated a transformative period marked by historic funding achievements, with average levels surpassing 100% for many, driven by rising interest rates and strong market performance. This era of progress, however, was tempered by persistent disparities, as a significant minority remained underfunded, grappling with structural and strategic challenges. The systematic de-risking through liability-driven investing reshaped portfolios, with fixed income allocations rising sharply, yet the limitations of traditional strategies became evident, exposing the need for innovation amid unhedgeable risks like downgrade drag and longevity uncertainty.
Charting a Path Forward
Reflecting on the year, the critical lesson from 2024 was the importance of adaptability in sustaining funding gains, and as we move into the future, plans must prioritize a broader toolkit to ensure success. This toolkit should incorporate alternative fixed income strategies such as asset-based finance and direct lending to diversify returns and enhance liability alignment. Customizing portfolios to specific funding levels and maintaining high liquidity emerged as essential practices to navigate volatile environments. For CIOs, the next steps involve continuous stress testing and scenario planning to anticipate risks, ensuring that strategies remain agile and responsive. By embracing these proactive measures, pension plans can solidify their resilience, safeguarding benefits for retirees against an unpredictable economic backdrop.
