Pension Investing — Time to Derisk?

Pension investment risk is driven in significant part by the proportions of plan assets allocated
across stocks, bonds and alternatives. It is also impacted by the risk of the investment strategies within each of these asset classes.

There is a confluence of factors that suggest now may be an opportune time for pensions to derisk by increasing allocations to bonds and to construct low risk fixed-income portfolios by holding high-quality and liquid bonds. These factors include improved funded status, high interest rates, tight credit spreads and increasing liquidity needs.

Funded Status Is Higher

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 to the right.

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.

Rates Are Higher

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 Are Tight

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.

Liquidity Is Important

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.

Investment Derisking May Be Opportune

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.

Author

Jeff Passmore, CFA (Lead LDI Strategist)

Jeffrey (Jeff) Passmore is a Lead LDI Strategist for the Long Duration and LDI strategies team for MetLife Investment Management’s (MIM) Fixed Income group. He is a Credentialed Pension and Investment Actuary and Liability Driven Investment Strategist. Prior to joining MIM in January 2022, Jeff was a member of the Long Duration teams at Barrow Hanley Global Investors (BHGI) and Standish Mellon. Before working in investment management, he was an Investment Consultant, Consulting Pension Actuary, and the Retirement Practice Leader of the Texas offices for two global pension consulting firms. Jeff earned a B.S. in Mathematics from the University of Texas in Austin. He is a Fellow of the Society of Actuaries, a Member of the American Academy of Actuaries, two-time past chairperson of the Investment Section, and a current member of the Pension Section. He is a CFA® charterholder.

Disclaimer

This material is intended solely for Institutional Investors, Qualified Investors and Professional Investors. This analysis is not intended for distribution with Retail Investors. This document has been prepared by MetLife Investment Management (“MIM”)1 solely for informational purposes and does not constitute a recommendation regarding any investments or the provision of any investment advice, or constitute or form part of any advertisement of, offer for sale or subscription of, solicitation or invitation of any offer or recommendation to purchase or subscribe for any securities or investment advisory services. The views expressed herein are solely those of MIM and do not necessarily reflect, nor are they necessarily consistent with, the views held by, or the forecasts utilized by, the entities within the MetLife enterprise that provide insurance products, annuities and employee benefit programs. The information and opinions presented or contained in this document are provided as of the date it was written. It should be understood that subsequent developments may materially affect the information contained in this document, which none of MIM, its affiliates, advisors or representatives are under an obligation to update, revise or affirm. It is not MIM’s intention to provide, and you may not rely on this document as providing, a recommendation with respect to any particular investment strategy or investment. Affiliates of MIM may perform services for, solicit
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