Art by Simone Virgini
As many corporate pension plans enjoy funding surpluses, plan sponsors are in a place many have not been for years: deciding how to use that money.
Widespread adoption of liability-driven investing by CIOs, plus the use of alternatives and reduced exposure to equity risk, have resulted in plan surpluses for a majority of plans for the first time since 2008.
In J.P. Morgan Asset Management’s 2025 corporate pension peer analysis report, Michael Buchenholz, head of U.S. pension strategy, says 55% of the top 100 corporate plans in its peer group are in a surplus—averaging 101.3%—for the first time since the global financial crisis. Comparatively, only 8% of the peer group was in a funded surplus in 2009.
Milliman’s 2024 Corporate Pension Funding Study, which considered the 100 companies with the largest defined benefit plans, saw similarly robust financials. In its report, Milliman estimated that in 2024, 34 companies had frozen U.S. pension plans with surplus assets.
Internal Debates
Achieving a surplus opens up possibilities to expand the potential for defined benefit pensions, Buchenholz suggested in the report.
“A new era of innovation beckons,” he wrote. “But a pressing question remains: Are plan sponsors willing to seize the moment?”
Plan sponsors could be hesitant to act due to fears that the surpluses may be temporary. Milliman’s report showed that in 2000, funded ratios for corporate pension plans exceeded 120%, but they fell to about 80% in 2002 after the dot-com bubble burst. In 2007, funded ratios were about 105%, but they fell to lower than 80% in 2008 in the global financial crisis and sunk slightly further in 2012.
Jonathan Glidden, the CIO of Delta Air Lines, says pension plans still have risks to watch for, even as overall investment risk and GAAP-funded-status risk in the average pension portfolio is much lower than during the global financial crisis and before the dot-com bubble. Closing or freezing plans and de-risking have reduced funding risk, but it has not gone away. Glidden points to 2022, when most plans lost money because equities fell sharply and U.S. Treasurys had one of their worst performances in years.
“That leaves a mark,” he says. “I mean, even if it doesn’t leave a mark in your GAAP-funded status, it leaves a mark in terms of what potential future pension contributions from the plan sponsor might look like.”
Delta’s pension plans were frozen at the end of 2005. The airline has several legacy pension funds that have approximately $16 billion in assets and ended 2024 at 106% funded.
Broadly, plan sponsors must balance risks and rewards as they decide what to do with the surplus, Glidden says. Plan sponsors need to consider income-statement risk, balance-sheet risk, earnings risk and contribution risk, balancing them against potential reward.
“I’d say, by and large, it’s still tilted toward that risk [not being] worth the reward,” he says.
Pension risk transfers remain an option, although plan sponsors’ use of such annuitizations has slowed down. According to the Milliman report, during fiscal 2023, pension risk transfers totaled $19.8 billion, down from $35.5 billion in 2022. According to Aon, 2024 was a record year, with $51.8 billion in PRT volume across 785 transactions.
The benefit for plan sponsors to use these tools is to eliminate some or all of their risk, Glidden says, but the pension’s assets and the discount rate it uses will determine if they are an appropriate fit.
SECURE 2.0 Increases Flexibility
The SECURE 2.0 Act of 2022 gives plan sponsors some flexibility about how they use surplus funds. Section 420(a) transfers allow sponsors to move surplus assets from a defined benefit plan to a health benefits or life insurance account without tax penalties, if it meets certain conditions.
The threshold at which plan sponsors can take advantage of that kind of transfer was decreased to 110% from 125%, but the transfer total must be “de minimis,” meaning the move involves no more than 1.75% of plan assets and the surplus needs to remain above 110%. Additionally, the plan needs to have a funding surplus of at least 110% for at least three years to make the transfer.
Glidden says while this is a big deal and could be material, even at 1.75% of plan assets, the need to keep the funding surplus at 110% for three years may limit how often plans have the opportunity.
Greater flexibility and certainty on how to use surpluses would be beneficial, he says. A member of the Committee on the Investment of Employee Benefit Assets, Glidden says the organization is trying to work with Congress to increase flexibility for using surpluses to cover some unfunded liabilities.
According to the Milliman report, if the 34 companies it estimates have frozen pension funds and surpluses could tap those assets to see immediate cash savings, “it may drive more companies to shift spending strategies from defined contribution to defined benefit vehicles for their employer-provided retirement benefits. If all of these companies made this switch it could free up a combined $37.7 billion in savings that could go to shareholders or other business initiatives.”
More Cash Balance Plans?
It was big news in 2023 when IBM reopened its frozen defined benefit pension plan for employees, because IBM had a significant pension surplus and it is now able to use that extra money to cover its retirement benefit contributions.
Cash balance plans are drawing attention, and J.P. Morgan’s Buchenholz wrote that a few corporations have added a cash balance plan, including Southwest Airlines, which began offering a market-based cash balance plan for its pilots in 2024. He says that was notable, since the airline did not have a legacy defined benefit plan on its balance sheet.
Glidden says the idea of plan sponsors augmenting a 401(k) plan with a new cash balance plan could be another way to use a pension surplus to help employees plan for retirement, adding that he was speaking generally, not about Delta’s plans.
“Retirement planning is really, really hard for most people,” Glidden says. “A modest guaranteed paycheck from a cash balance plan to augment 401(k) and Social Security would make things easier.”
Cash balance plans help reduce the potential for future funding or contribution risk, since plan sponsors can choose the payout rate, he says.
Asset Allocation Changes
CIOs may manage their portfolios differently as they move from underfunded to surplus. Glidden says CIOs trying to manage GAAP-funding-status volatility will want to own a lot of bonds as a hedge, but as a plan reaches overfunded status, the portfolio’s total risk will become more important.
Delta’s portfolio includes 40% hedge funds, 30% private investments and a derivative overlay that is now mostly fixed income.
“We’re just really trying to ratchet down both the GAAP-funded-status volatility, but also the overall asset volatility, to reduce the probability that the plan sponsor has to make contributions in the future and to reduce the probability that our funded status dips much from the 106[%] where it is today,” Glidden says.
LDI strategies helped many pension plans reach overfunded status, but he says as plans reach this overfunded status, they may want to do less LDI and focus on other factors, such looking at the Sharpe ratio and Sortino ratio.
“If you’re defining risk in terms of total risk, total volatility, the risk of losing money, then 100%, LDI is not an efficient implementation,” Glidden says. “As your overfundedness really starts to increase, I think you can actually do a little bit less LDI and a little bit more to maximize your Sharpe ratio.”
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Tags: Committee on the Investment of Employee Benefit Assets, Corporate pension funding, Delta Air Lines, J.P. Morgan Asset Management, Jonathan Glidden, Michael Buchenholz, Milliman, SECURE 2.0 Act of 2022