DB Plans Focus on Hedging Volatility, Evaluating Options

The past few years have been great for corporate pension funds. Strong portfolio performance has improved the funded status of corporate defined benefit pensions across the board, returning most plans to funding levels not seen in more than a decade. According to the latest data from Milliman, the funded percentage of the Milliman 100—a group of the largest public corporate pension plans—increased to 103.8% from 101.1% in 2025. The funded status surplus improved to $48.1 billion from $13.4 billion.

Milliman data show that assets and liabilities increased, but the growth in assets—driven by an 8.80% actual rate of return—outpaced liability growth.

Hedging Volatility

Forecasts for corporate pension defined benefit plans started 2026 positively. Most of these plans are well hedged through liability-driven-investing models. Even plans that use other investment frameworks, such as total return, saw similar increases in funded status and strong performance, according to data from Milliman and NEPC.

However, markets were incredibly volatile in the first quarter, before rebounding in April and then wobbling once again as negotiations over the war in Iran broke down. Central banks may also keep interest rates unchanged to avoid being forced to increase them as a result of energy price shocks. So far, pension portfolios have held up, says Martin Jaugietis, co-head of pensions for the Americas in the multi-asset strategies and solutions group at BlackRock.

“One of the benefits of liability-driven-investing models is that you’re hedged against your specific liability needs,” Jaugietis says. “So if you see a change in the funded ratio—which some plans did in March, before making up all of their losses in April on the equities side—it’s not going to impact the plan that much, because they’ve got those hedges built into the fixed-income side of the portfolio.”

Some plans have also made tactical moves to position themselves during the volatility.

“Within the liability hedging portfolio, credit spreads are quite tight within investment-grade corporate bonds,” Jaugietis says. “We encouraged some clients to reduce some of the weight within that position to improve their overall funded ratio. In the first quarter, going into the second quarter, those spreads widened a bit, so it was helpful to have cut back on the exposure before those spreads opened up.”

With volatility likely to remain elevated, some pension fund CIOs are adjusting their scenario analyses to make sure they remain well positioned.

“If you are less than 100% hedged, it might be worth considering a 2022 scenario analysis, where equities sold off and interest rates went up,” says John Delaney, U.S. CIO at WTW Investments. “I think that would help people understand some of the potential trade-offs.”

There is also work ongoing to refine LDI hedges and add diversifiers into the mix. Matt Maleri, partner in and head of insurance at NEPC, says, “We’re seeing much more attention paid to duration exposures and trying to match liabilities across the yield curve, not just in totality—also understanding the split between credit and Treasury bonds that is needed to match their liabilities.”

As plans work through that process, some sponsors are looking at investment-grade private credit and long-duration mortgages as diversifiers.

Private Markets Viewed With Caution

Questions have emerged recently about using private market investments as diversifiers or hedges within pension portfolios. Private credit, specifically, has been under the microscope from many angles, as credit quality and loan performance have both been questioned.

Delaney says plan sponsors might benefit from thinking about private credit more strategically. Capital flooded into direct lending opportunities over the past decade, and that market is much more crowded now. However, there are areas, such as real estate debt or asset-backed lending, where he says there is less competition and borrowers are still paying a relatively high premium due to the risk.

Plans that are newer to investing in private markets have started looking at new structures, such as evergreen funds, because they have lower minimum investments and can offer liquidity. Jaugietis says, however, there is a slight trade-off, as those funds can have a lower total return than traditional drawdown funds.

Plan sponsors may also need to manage expectations of the liquidity available through the newer structures. Many of them claim to offer quarterly liquidity, but Delaney says, “The odds that you are going to be the only investor redeeming during one of those windows is pretty small. So you could end up in a queue. Realistically, investors need to think about these structures on a five- or six-year time horizon. That’s going to set you up for getting the most out of the exposure, and you’re going in with the understanding that it’s not an immediate source of liquidity.”

NEPC’s Maleri agrees with the focus on long-term thinking.

“The purpose of an evergreen vehicle, in our view, is that you don’t need to constantly make new commitments to a fund that calls capital, draws it down and returns it,” Maleri says. “But we would caution plan sponsors that these aren’t really tools for liquidity.”

Delaney adds that in this environment, stress testing remains a good option to ensure plan sponsors know what they will do if markets start selling off in earnest.

“There’s always liquidity—until there isn’t,” he says. “Daily funds become monthly funds, monthly funds become quarterly funds, and so on. Even if you are hedged, doing the work ahead of time to understand how you want to be able to respond in a sell-off is going to benefit you. And you’ll get a better picture of how some of these diversifiers actually work in your portfolio and alongside your specific goals.”

Options for Overfunded Plans

Overfunded pensions now have more options than ever before to manage their surplus assets to benefit both company balance sheets and plan participants. Zorast Wadia, a principal and consulting actuary at Milliman, points out that by decreasing or ceasing contributions to a 401(k) plan and instead reopening a company’s DB pension plan for employees, the company would be able to access the surplus funding in the pension fund to cover its IRS-mandated minimum retirement plan contributions. As a result, retirement benefits could increase without an additional cash expenditure.

“We’re still in an education phase with some of this,” Wadia says. “A lot of corporate pensions froze their defined benefit plans in 2008 when there was a lot of volatility and the rules were different and harder on balance sheets. The rules have changed, but many organizations still have that period in the back of their minds.”

Milliman data show that if all frozen plans in the Milliman 100 took advantage of the new rules, they could free up a combined $54.9 billion in savings that could go to shareholders or into other business initiatives.

Some already have. IBM made headlines in 2023 for using all of the levers it had to do pension risk transfers and then re-open its pension plan. However, since then, few other large plans have taken the next step. Sources say reopening or doing more with cash balance plans is very much being discussed by plan sponsors, but making significant plan design changes can be a years-long process for plan sponsors, which tend to be a slow-moving group.

“I think it’s going to take some time before we start to see a big shift here,” Jaugietis says. “There was previously some financial urgency around reducing the size of the pension plan because it was a burden on the balance sheet. That’s changed now, and CFOs are realizing it can be a net benefit when you’re at this level of funded status.”