The illusion of safety: Rethinking the endgame for corporate pension plans

Fast forward to 2025, rates are now significantly higher causing the interest cost component of liability growth to increase. Exhibit 2 shows the new hurdle of 6.7%, requiring a more growth-oriented allocation - an increase of 25% in growth assets to 35% in Growth and 65% in LDI. This re-risking may feel counterintuitive, especially for plans nearing hibernation or termination. But in some cases, reassessing the growth allocation is necessary to stay on track.

The carry effect in pension portfolios

Another headwind for pension plans is the liability “carry effect.” This represents the performance drag that occurs when the yield on liabilities exceeds the yield on LDI assets, which is especially apparent for underfunded plans. This was largely forgotten during the post GFC low-rate era, but it’s back with force. It’s especially pronounced for portfolios that emphasize rate hedging over credit exposures, which tend to yield more.

Exhibit 3 below shows the carry effect on an underfunded plan in a low vs. high-interest rate environment. As interest rates increase, the yield gap becomes a larger hurdle for the plan assets to meet to increase the funded ratio.

Growth with guardrails: Building resilience

To help bridge the return gap, the Growth portfolio plays a critical role. In higher rate environments, this may mean allocating more to Growth, even for mature plans. Yet many plans are understandably cautious about increasing volatility. That’s where “Growth Diversifiers” come in - defensive assets that offer return potential with structural resilience to help mitigate funded status volatility. These include:

• Bank loans: Floating-rate instruments that preserve capital and generate income— helping stabilize returns when traditional LDI assets may underperform in rising rate environments.
• Global REITs: While listed real assets trade more closely with equities, and tend to be fairly sensitive to interest rates, global REITs offer long-term diversification with a high proportion of the return coming from stable income.
• Infrastructure (listed or private): With inflation-linked revenues that are less tied to economic cycles and long-term contracts, infrastructure tends to behave like pension liabilities, helping mitigate funded status volatility.
• Private credit: Offers spread characteristics similar to pension liabilities, with higher return potential than traditional investment grade fixed income.

Looking at cumulative historical performance in Exhibit 4, listed infrastructure and bank loans have shown strong resilience — maintaining stability during drawdowns in U.S. equities and participating in recoveries. High yield also shows resilient properties, but less so when absolute yields are low and spreads are tight as occurred heading into 2022.

Exhibit 4: Resilience properties of asset classes

A new endgame mindset for defined benefit plans

This evolution reflects a broader shift, from a binary “risk-on/risk-off” mindset to a more integrated framework that balances:

• Liability alignment: Maintaining interest rate sensitivity where it matters most
• Return resilience: Ensuring the portfolio can grow across economic regimes
• Liquidity awareness: Managing cash flow needs, especially in the face of benefit payments, potential lump sum elections, and pension risk transfers
• Evolving strategic goals: Desire to grow a surplus for broader strategic initiatives

With many corporate DB plans now overfunded, we believe 2025 marks a strategic inflection point. Plans are no longer just managing risk - they’re managing opportunity.

Whether it’s optimizing surplus, navigating risk transfer, or evolving plan design, today’s complexity is accelerating the shift toward professionalized oversight. For many, that means embracing solutions and partnerships that combine real-time portfolio analytics, fiduciary alignment, institutional execution, and operational agility. We believe OCIO providers are positioned to deliver this integrated support. Ultimately, this is about redefining what it means to be “end-game ready.” It’s not just about reaching full funding—it’s about sustaining it. We believe that requires portfolios that are not only hedged, but also adaptive, income-generating, and aligned with long-term plan objectives.

For more information or an in-depth analysis of your plan, please reach out to BlackRock’s Client Solutions Group or Multi-Asset Strategy and Solutions team.