In the Age of Surplus, Invest Like an Insurer

Funding levels for corporate defined benefit (DB) plans have been on the rise in recent years. In fact, many plans are now in a surplus position and have the luxury to weigh the considerations between (1) de-risking through a pension risk transfer (PRT) to an insurer and (2) managing the portfolio in a hibernation strategy to preserve and improve the funding level as plan liabilities run-off over time. Holding off on a buyout, however, begs the question of how to invest the surplus to realize the potential benefits that the financial cushion may provide. Our answer: Look to the insurance industry for an investment framework.

Growing attention around surplus and the optionality it offers

DB pension plans have seen material improvements in funding levels over the last decade. According to L&G’s Pension Solutions Monitor, the average funding ratio across the corporate DB landscape now exceeds 110%, continuing a trend of improvements since the COVID pandemic.¹ 

As plan sponsors now find themselves more than fully funded, there has been a growing recognition of the opportunities and flexibility that exist from continuing to manage the plan in run-off mode. These include the potential to generate pension income through the sponsor’s financial statements, the ability to enhance benefits for plan participants, and even the possibility of reopening frozen plans to serve as an employee retention and recruiting tool. More opportunities could be on the horizon as well. This level of surplus is a recent phenomenon, and we anticipate newer, innovative thinking in the coming years on best use cases for a plan’s surplus assets.

As a result, more companies aim to keep their overfunded plans compared to prior years. In our experience, historically, for many underfunded plans, the primary goal was to obtain a funding level between 105-110% so they could pursue a PRT. Market movements and the rise in Treasury yields have catapulted many plans to a surplus position. We’re seeing a pause on those termination plans for many sponsors. Indeed, according to a recent Mercer survey, 50% of plan sponsors do not intend to terminate their DB plans in 2025, up from 36.7% in 2023.²  

Taking a cue from insurers

There is no one-size-fits-all solution here. Circumstances matter—investment objectives, time horizon and the size of the surplus (the greater the surplus, the higher the risk tolerance in many cases). Perhaps most important is how much risk a plan sponsor is comfortable with. 

For those that wish to pursue a hibernation strategy, the question of how to invest the surplus is front and center. We believe the investing framework used by many insurers is worth considering. It consists of two portfolios: a liability-driven investing (LDI) portfolio and a surplus portfolio. 

Figure 1: The investment framework used by many insurers consists of two portfolios

Source: L&G – Asset Management, America. For illustrative purposes only.

The LDI portfolio focuses on meeting benefit payments and covering the Projected Benefit Obligation (PBO), or even a more conservative estimate of the liability. It may include investment grade (IG) corporates, a Treasury component, IG private credit and securitized assets, and it may be managed in a cash-flow-matching context. 

The surplus portfolio can be divided into three pots:

1. Capital preservation: Low risk, liquid assets. These assets provide a risk buffer against adverse outcomes for the LDI portfolio, while also delivering returns above cash.
2. Short-term growth: Liquid investments that offer some growth potential at a moderate risk level.
3. Long-term growth: Return-seeking assets with higher growth prospects but also higher short-term risk of loss, such as private assets and equities.  

Figure 2: The surplus portfolio can be divided into three pots

Source: L&G – Asset Management, America. For illustrative purposes only.

The portfolios in action

We use a stochastic model to project the funding level of three different portfolios over a 10-year period (beginning funded status of 125%). 

1. Total-return approach maintains a broad 60/40 equity / bond asset allocation while avoiding an investment framework within a liability context.  
2. The minimal volatility portfolio assumes an LDI strategy has been adopted as the plan de-risked and invests the surplus in a conservative manner.
3. Insurer approach assumes the investment framework as proposed above.

Figure 3: The insurer approach balances growth and preservation objectives

Source: L&G – Asset Management, America. For illustrative purposes only.

As suspected, the total-return approach offers the greatest opportunity for return; however, the “worst-case scenario” results in a funding level that dips below 100%, reaching 87% over the period. The minimal volatility portfolio offers the highest floor, but the lowest ceiling, as the LDI portfolio keeps up with the liability and the surplus assets remain conservatively invested. The insurer approach balances the growth and preservation objectives, ensuring a healthy funding level in the 95th percentile scenario while still offering upside potential to growing the plan’s surplus.

The bottom line

Investing like an insurer can potentially help plan sponsors preserve funding levels and grow a surplus, while retaining flexibility to pivot to a PRT down the road. The insurance industry has demonstrated the ability to successfully manage a surplus within a liability-aware context. We believe it would be prudent to adopt principles from the insurance investing framework as the corporate DB landscape enters this new surplus regime. 

 

1. Source: L&G – Asset Management, America.. Data as of June 30, 2025.
2. Source: Mercer's 2025 CFO Survey 2025 CFO Survey Results - Executive Summary.

Disclosures

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