Defined benefit (DB) pension plans across the U.S. are adjusting their investment strategies in response to ongoing market fluctuations. Jeff Passmore, Lead LDI Strategist at MetLife Investment Management, explains how a mix of strong equity returns, rising interest rates, and persistent volatility has pushed many plan sponsors toward derisking their asset allocations.
“Equity markets have posted above-average gains in recent years, significantly improving the funded status of many pensions,” Passmore notes. “This, combined with interest rates climbing above 4% since August 2023, has created favorable conditions for derisking.”
Plan sponsors nearing or achieving full funding are reallocating assets from equities into bonds, aiming for more stable returns. Those with a substantial fixed-income portfolio are exploring diversification within that segment, while some overfunded plans are building surplus portfolios that include equities and alternative assets. Additionally, private credit—particularly investment-grade—is gaining traction due to its combination of steady cash flow, capital preservation, and attractive yield premiums.
For plans that are slightly under or overfunded, balancing equity exposure with long-duration fixed income remains key. Passmore points out that higher bond yields offer an opportunity to lock in value and hedge liabilities, especially for corporate pension plans sensitive to interest rate changes.
With potential rate cuts on the horizon, he advises plans to add longer-duration bonds to better manage the impact of falling rates on liability valuations. “Additional duration helps hedge the risk of declining rates and supports returns,” he says.
Plan termination remains a consideration for many sponsors. Since the Fed’s rate hikes in 2022, more plans have moved toward this route, often ending in annuity purchases. However, some sponsors are reconsidering, opting to manage derisked plans long-term instead of terminating.
Passmore emphasizes the importance of projecting future funded status and liquidity needs. For frozen plans, even a modest surplus can grow quickly, offering new strategic options. “Hedging a portion of the liabilities and using the rest to build a surplus can unlock new opportunities,” he adds.
Looking ahead to the second half of 2025, Passmore highlights the importance of remaining agile. “We hope for a stable investment climate but are prepared to help clients execute their derisking strategies amid any challenges,” he concludes.
Want to stay ahead of the curve in personal finance? Dive into more expert-driven insights at Finance Tech News.
News Source: InvestmentNews.com
