U.S. pension plans have achieved improved funded status for a number of reasons.
First, equities have had several years of strong returns. Four of the last five and seven of the last 10 years have had double-digit equity returns as shown below.
Taft-Hartley plans are better funded as a result of the Special Financial Assistance (SFA) program. SFA has injected significant new capital into this important segment of U.S. pension plans. The program is expected to add over $90 billion to some of the most underfunded among these plans. The majority of this amount has already been paid out.
Corporate pensions have benefited from higher discount rates. Liabilities for these plans are measured using AA-rated corporate bond yields. These yields are higher as a consequence of higher interest rates and in spite of atypically tight credit spreads. Discount rates topped 5% in September of 2022 for the first time since August of 2011. They have remained close to or above 5% since then.
As funded status improves, pensions can afford to take less risk with their investments and still expect to keep pace with liability growth.
Higher interest rates reduce the cost of bonds, making it cheaper to derisk. The Federal Reserve began raising interest rates in March 2022. By August of 2023, yields on 10-year U.S. Treasuries had risen to above 4%. This is the first time rates have been consistently that high since the financial crisis in 2008.
Credit spreads represent a yield premium in return for taking credit risk. Historically, spreads have been mean-reverting. When tight relative to their historic average, they tend to move wider and vice versa. Currently, spreads are tight relative to their average level. For example, the spread as of June 3, 2025,for the Bloomberg Aggregate Index was 34 basis points (bps), 24 bps tighter than the 20-year average of 58 bps.
Tight spreads represent relatively little compensation for taking credit risk. This supports derisking bond portfolios.
The U.S. population is aging, and most pensions are aging faster. Aging plan populations put an increasing benefit payment demand on plan assets. Publicly traded bonds help to meet these rising benefit burdens by providing regular cash flows through coupon payments and maturities. They also provide liquid sources of funds as needed for benefits, expenses or transactions like lump sum windows and pension risk transfers.
These four factors: Improved funded status, high interest rates, tight credit spreads and increasing liquidity needs all indicate that now is a good time for plan sponsors to consider derisking by increasing their allocation to bonds and by increasing the credit quality and liquidity of their fixed-income holdings.
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