Author: Tom Cassara
July 2025
For sponsors and trustees of defined benefit (DB) plans — whether corporate, church or public — today's market presents a rare convergence of favorable funding conditions due to equity performance and relatively higher interest rates. In addition, competitive annuity pricing is being seen from the annuity provider market.
While each type of plan operates under different regulatory frameworks, the current environment offers universal opportunities to strengthen funding, reduce risk and position for long-term sustainability.
What's driving the opportunity?
Across the board, several market factors have aligned:
- Equity markets at historic highs. Strong equity performance has lifted plan assets and contributed meaningfully to improved funded status, particularly for plans with growth-oriented portfolios.
- A more traditional yield curve. After years of distortion, the shape of the curve now allows for more predictable fixed income performance and more effective liability hedging.
- Tight credit spreads amd strong annuity pricing. While spreads are narrow, the resulting environment has created attractive annuity pricing. This is a critical factor for sponsors exploring liability settlements or retiree carve-outs.
- Multi-year highs in funded status. Many plans — especially those that have frozen benefit accruals or followed disciplined investment policies — are in their strongest financial position in over a decade.
Strategic considerations by plan type
Let's break down what these conditions mean for your specific plan category:
Corporate (ERISA) plan sponsors
- Frozen plans should be actively planning for termination. Favorable funded status and annuity pricing mean this is the most cost-effective time in recent memory to settle liabilities.
- Even ongoing plans should revisit hedge ratios. With liabilities more stable and equity valuations high, sponsors should consider increasing LDI allocations and managing funded status volatility more precisely.
- Annuity buyouts can be accretive. Some annuity purchases today can settle more liabilities than assets exchanged, enhancing funded status.
- Prepare to use excess assets wisely. Planning now for surplus — via reversion, retiree medical or other benefits — can help ensure compliance and optimize value.
Church plans
- Unique flexibility, same opportunity. Though not subject to ERISA, church plans can take advantage of the same favorable annuity pricing to reduce benefit payment burdens and enhance long-term sustainability.
- Reallocated credit risk, increased certainty. Swapping credit holdings for annuity purchases can improve liquidity by reducing benefit outflows, even if the plan doesn't mark liabilities to market.
- Time to formalize strategy. Many church plans are informal or loosely structured — this moment offers an incentive to lock in strong positions and formalize funding strategies.
Public plans
- Smaller or closed plans should strongly consider de-risking. While large public systems may have constraints, smaller or frozen plans can exchange assets for annuities and reduce long-term fixed income exposure.
- Retiree carve-outs can reduce operational complexity. Reducing near-term benefit payment liquidity pressure through annuity purchases improves financial flexibility in the upcoming years and allow for a larger percentage in growth and/or illiquid investments.
- Policy flexibility allows proactive action. Public plans often face long-term funding challenges. Acting now, while funded status is strong, helps mitigate future contribution spikes.
Final Thoughts
Every DB plan is different, but the message is the same: this is a moment to act. Whether you're managing a frozen ERISA plan on the brink of termination, a church plan seeking stability, or a public plan looking to reduce volatility, today's market conditions offer rare strategic leverage. What you do in the next 6-12 months could materially define your plan's financial future for the next decade.
