Top considerations for defined benefit plan sponsors in 2026
We believe 2026 demands that DB plan sponsors should consider adopting a multifaceted strategy of balancing conservative liability hedging with selective risk-taking.
The defined benefit (DB) pension landscape in 2026 presents a nuanced environment marked by continued improvement in funded status, historically low credit spreads, and evolving regulatory and market dynamics. Plan sponsors face a complex interplay of challenges and opportunities as they navigate portfolio construction, risk management, surplus utilization, and plan governance to optimize plan sustainability and participant outcomes.
Overall, we believe 2026 demands that DB plan sponsors should consider adopting a multifaceted strategy of balancing conservative liability hedging with selective risk-taking, exploring new risk transfer mechanisms, and leveraging strong governance. Our DB top considerations for 2026 were developed with the goal of maintaining the plan’s health and ensuring participant security, despite a challenging but opportunity-filled environment.
Key Considerations
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Reassess credit allocation and spread exposure strategies amid historically tight credit spreads to help mitigate downside risk from potential spread widening. Consider adjusting the credit spread hedge ratio to reduce excessive spread sensitivity.
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For plans in hibernation, evaluate increasing the return-seeking asset allocation from the traditional 10% to 15-20% to meet funding objectives amid higher discount rates and elevated equity valuations. Consider diversifying return-seeking portfolios beyond equities to include alternative risk premia.
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Consider borrowing from the insurer playbook to include investment grade private credit in the liability hedging portfolio to help enhance returns while still maintaining sufficient liquidity for pension payments.
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Consider employing interest rate overlays using derivatives to seek to efficiently manage interest rate risk and increase asset duration, enabling higher allocations to growth assets without increasing funded status volatility.
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Explore private market investment options through newer evergreen and semi-liquid structures that balance enhanced diversification and improved liquidity, while being mindful of potential trade-offs in expected returns.
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Explore private market investment options through newer evergreen and semi-liquid structures that balance enhanced diversification and improved liquidity, while being mindful of potential trade-offs in expected returns.
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Monitor legislative and regulatory developments, especially proposed laws like the Strengthening Benefit Plans Act of 2025, which could expand surplus utilization options, making ongoing plan sponsorship more attractive.
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Stay current on pension risk transfer market dynamics, including litigation risks and insurer competition, to help optimize timing and structure of buyout or buy-in transactions.
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Evaluate innovative pension risk transfer solutions, such as captive insurers for plan termination, to potentially achieve cost savings and better align with complex asset profiles.
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Prioritize governance enhancements to drive strategic agility and mitigate risk; effective governance can yield a 'governance premium' by enabling faster, more confident decision-making and improved operational resilience.
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