How Taft-Hartley plans can manage funding ratios amid volatility

Many Taft-Hartley plans ended 2024 in a strong financial position. The average plan’s funding ratio hit 97%¹  in December 2024, an eight-point increase from the previous year, lifted by strength in the equity market and financial assistance through the American Rescue Plan Act of 2021. Funding likely remained high in the first half of 2025, as bond yields stayed elevated and stocks posted strong gains despite sometimes severe volatility.

Whether these constructive market dynamics can continue is an open question, given concerns about government policy, economic growth, inflation, and other key factors. Taft-Hartley sponsors may want to consider strategies to preserve the gains they have made in recent years.

Staying above funding thresholds

The need to protect funding ratios may be especially acute for plans with below-average ratios. ERISA defines funding thresholds that affect how Taft-Hartley plans must be funded and managed. For some sponsors, the volatile market environment may trigger worries about falling below ERISA funded status thresholds.

A plan with funding status below 80% is classified as endangered. This designation may require a plan to outline improvement or take actions to address the shortfall, such as increasing contributions and/or reducing benefits.

The unique multiemployer nature of Taft-Hartley plans can make these types of changes extremely challenging. For example, unions may be reluctant to reduce plan participant benefits, while companies funding multiemployer plans may be reluctant to increase contributions when already faced with difficult operations and economic headwinds. Plans confronting these constraints may look first to investment strategy to minimize the chances of falling below funding thresholds.

Strategies for managing unpredictable markets

Strategic asset allocation is the first line of defense against volatile markets. Many plans also employ tactical asset allocation to reduce exposure to riskier assets during periods of high volatility. Those that feel the need to boost funding ratios, whether to stay above thresholds or for other reasons, may be tempted to adjust allocations in pursuit of stronger returns—but this approach typically is hard to pull off and can pose considerable risks.

Plans can take other strategic and tactical steps to manage the uncertainty presented by volatile markets, including:

Defensive equity strategies

Defensive, low-volatility equity strategies may help plans harness equities’ potential growth while managing downside risk. These investment approaches typically use in-depth fundamental analysis to focus on high-quality companies with relatively stable earnings, strong cash flows, healthy balance sheets, powerful competitive advantages, and prudent management. The strategies also may emphasize sectors with lower sensitivity to economic cycles, such as health care, utilities, and consumer staples.

Defensive equity strategies may give up return versus more aggressive approaches during risk-on periods. That said, their downside protection in volatile markets may prove more valuable over a full market cycle.

Use of derivatives

Derivatives can enable Taft-Hartley plans to hedge against both decreases in assets and increases in liabilities. For example, equity options can reduce the impact of stock market downturns, while interest rate swaps can help protect the plan in the event falling interest rates cause liabilities to rise. Since derivatives typically require relatively small capital outlays, plans can secure meaningful protection without having to liquidate long-term assets, helping improve their flexibility and capital efficiency.

Short-term derivatives and physical assets work together to help pension plans maintain stable funding levels. For example, a Taft-Hartley plan teetering toward endangered status could use a short-term derivatives program to increase the likelihood that its funded ratio won’t slip below a certain level.

Splitting the plan by participant status

Separating a pension plan into separate groups of active and retired participants can provide greater clarity around the best ways to manage its assets, making it easier to align investment strategies with each cohort’s risk profile and liquidity requirements. Retirees’ liabilities become more visible and predictable, better positioning the plan’s managers to match those liabilities with bonds that provide corresponding cash flows. Assets for active participants—who generally have longer time horizons and higher risk tolerance—can be invested more aggressively to pursue growth.

The value of guidance

Recent years’ market conditions have helped many Taft-Hartley plans improve their funding ratios. These plans may be well positioned to put measures into place that prepare them for potential volatility in both assets and liabilities. As they consider an uncertain future, plans can look beyond simply trying to maximize assets and instead consider a range of options that may help maintain and improve funding levels, including defensive equity strategies, the use of derivatives, and splitting the plan into groups of active and retired participants.

At State Street Investment Management, our goal is to be your trusted advisor—partnering with you to understand your plan’s current status, specific needs, and challenges. We aim to deliver customized, high-performing, and cost-effective solutions that help you meet your objectives and strengthen the overall health of your pension plan. Please contact your relationship manager to learn more about options for protecting a Taft-Hartley plan’s funding ratio.