Pension surplus era reshapes strategy as corporate plans rethink risk and returns

US corporate pension plans are entering 2026 in a position of strength, but that progress is reshaping, not simplifying, decision-making.

A new report from BlackRock finds average funded ratios for defined benefit plans have reached roughly 108%, up sharply from about 87% in 2018. With many plans now overfunded, sponsors are shifting focus from closing deficits to preserving gains and determining how best to deploy surplus assets.

That shift is altering long-standing investment approaches, particularly around liability-driven investing. While LDI allocations expanded significantly over the past decade, the pace has slowed since 2019, suggesting sponsors are no longer defaulting to further de-risking. Instead, many are maintaining exposure to growth assets as the marginal benefit of additional hedging declines.

At the same time, a changing rate environment is complicating hedging decisions. With the Federal Reserve expected to ease policy, short-term yields may fall while longer-term rates remain elevated, potentially steepening the yield curve. That dynamic introduces new risks, particularly for plans heavily hedged at the long end, where mismatches could erode funded status.

Credit exposure is another area under review. With investment-grade spreads near historic lows, their role in liability discount rates has diminished. The report notes growing interest in reducing spread exposure and diversifying into other sectors, including private credit and securitized assets.

Higher hurdles, broader toolkit

Even as funding improves, return requirements are rising. BlackRock estimates that a fully funded plan now needs to generate about 7.3% annually to reach a 110% funded ratio over a decade, up from 4.7% in a low-rate environment. The increase is largely tied to higher interest costs on liabilities.

That shift is prompting renewed interest in private markets. Once primarily used by underfunded plans seeking higher returns, alternatives are now being reconsidered by well-funded sponsors trying to keep pace with liability growth without increasing contributions.

The report highlights growing use of semi-liquid and evergreen structures, which offer greater flexibility than traditional private market vehicles. Areas such as private credit, infrastructure, and secondary private equity are attracting attention, particularly for their income potential and alignment with long-duration liabilities.

Surplus strategies take center stage

With surpluses in place, sponsors are weighing a range of strategic options. These include maintaining a buffer, enhancing benefits, reopening plans, or executing pension risk transfer (PRT) transactions.

PRT activity remains a key lever. After a slower start in 2025, the market rebounded late in the year, with total volumes estimated between $45 billion and $50 billion. Most transactions continue to focus on partial risk transfers rather than full plan terminations.

Some sponsors are also exploring ways to return surplus to the organization, though tax implications can be significant and require careful structuring.

Outsourcing gains momentum

The report also points to continued growth in outsourced chief investment officer models, now used by 39% of US defined benefit plans, up from 29% in 2020. While traditionally adopted by smaller plans, larger sponsors are increasingly considering outsourcing to manage complexity, reduce costs, and access broader capabilities.

Overall, the report underscores a more complex landscape for pension sponsors. With funding no longer the primary concern, the challenge has shifted to balancing risk, return, and strategic flexibility—marking a clear move beyond the singular goal of full funding.