Accelerate de-risking to lock in 2025 funded status gains
Corporate defined benefit (DB) funded ratios rose strongly again in 2025, but history shows how quickly those improvements can be wiped out—unless plans take steps to protect them.
Thanks to positive market conditions, most corporate pension plans have enjoyed strong improvements in funded status over the past several years. Last year was no exception. Strong monthly investment returns boosted the average funded ratio to 108.1%1 in December 2025, the ninth consecutive month of improvements to corporate plan funded ratios.
Rising surpluses are worth celebrating. But as we’ve seen in the past, a sudden market downturn can quickly wipe out funded status gains—unless a plan has taken steps to protect those improvements.
No one knows when market conditions might change and reverse this trend of improving funded ratios. That’s why we encourage corporate plans to look for opportunities to speed up their de-risking and lock in funded status gains early in 2026.
Avoiding the mistakes of the past
When plans have not adopted a rigid glidepath that frequently adjusts assets, there is typically a lag between improvements in a plan’s funded status and its adoption of additional assets in a liability hedging portfolio. The generally slow process of decision-making that’s common in DB governance often contributes to this lag in adjusting investments to reflect changes in funded status. Likewise, allocations to less-liquid assets can slow down the pace of asset allocation adjustments. But extended periods of strong market returns can also lead to overexuberance among plan sponsors who want to maximize funded status improvements by maintaining larger allocations to return-seeking assets.
Whatever the reason for the delay, waiting too long to de-risk has led to several painful experiences for corporate DB plans over the past 25 years. The dot-com market bubble saw corporate plans riding high with an average funded ratio that peaked at 123.4% in 2000. When the bubble burst shortly after, that average funded ratio fell to 82.2% by 2002. The gradual recovery of the markets through the early 2000s pushed the average funded ratio back up to 105.8% by 2007—only to see those improvements wiped out the next year, when the financial crisis sent the average funded ratio down to 79.1%.2
More recently, we saw the same pattern in 2019, when DB plans’ average funded ratios increased nearly 10% in less than six months. Because most plans did not move to de-risk, sponsors saw those gains evaporate when lower rates and an equity market correction caused a 12% decrease in average funded ratios in less than three months.3
Closing the hedging gap
Reducing equity exposure to increase allocation to hedging assets remains a simple yet efficient way to protect funded ratio improvements from sudden market changes. Plans may also seek to improve their risk/return profile by investing in strategies that can both hedge liabilities and seek returns. Examples of such “bridge assets” include high yield, leveraged loans, emerging market debt, and global low volatility equity.
As corporate DB plan sponsors plans know, market levels as of December 31, 2025 will drive firms’ P&L and contributions for years to come. Because pension “perfect storms” can happen abruptly, sponsors may consider taking additional de-risking steps now in order to stabilize their future financials.
These timely adjustments to a plan’s asset allocation can help corporate plans take full advantage of the funded status gains they’ve recently enjoyed. Doing so can also help ensure that the plan will meet its long-term obligation to pay out benefits to participants, no matter what direction the markets take in the future.
Contact State Street Investment Management to learn more about de-risking strategies and LDI investing solutions.