Key Takeaways
- • The 100 largest corporate pension plans were 104.1% funded according to Milliman, and average duration liability has fallen below 10 years, leaving many plans with hedge portfolios that dwarf return-generating assets.
- • NEPC's 2026 Corporate Defined Benefit Peer Study found plans did not de-risk further in 2025, with average fixed-income allocations roughly unchanged year over year.
- • 37% of surveyed NEPC plans use at least one nontraditional LDI diversifier, such as private placements, structured products or real estate debt, to hedge liabilities.
- • Shorter pension durations could reduce long-end demand for Treasuries and STRIPS, shifting buying toward intermediate credit and government bonds, though J.P. Morgan's Jared Gross says the impact on Treasury yields would likely be modest.
- • Aon's "enhanced LDI" approach uses investment-grade private credit, private real estate debt and collateralized debt as hedging assets, while NEPC sees many plans keeping managers but changing mandates toward intermediate duration.
Summary
Corporate pension plans that adopted liability-driven investment (LDI) programs after the global financial crisis have largely achieved their goal. According to Milliman, the 100 largest corporate pension plans were 104.1% funded, and the average duration of their liabilities has fallen below 10 years. For many sponsors, portfolio hedges now outweigh return-generating assets, prompting a reassessment of how hedging is structured.
NEPC's annual Corporate Defined Benefit Peer Study and Survey, released in April, showed that plans did not de-risk further in 2025, with average fixed-income allocations in the consultancy's peer group roughly unchanged year over year. Some sponsors are exploring nontraditional LDI diversifiers, including private placements, structured products and real estate debt. NEPC reports that 37% of surveyed plans use at least one of these asset classes for hedging.
The shift carries implications for bond markets. Pension funds were significant buyers of long-duration U.S. Treasuries and corporate bonds, and if they become less price-insensitive buyers, demand at the long end could soften. Jared Gross, head of institutional portfolio strategy at J.P. Morgan, said plans will need more intermediate-maturity credit and government bonds and fewer Treasury STRIPS or interest-rate hedges, though the need for long-dated products will not disappear. He added that modest pension demand shifts are unlikely to be the primary driver of Treasury yields. Liying Wang of the University of Nebraska-Lincoln expects corporate issuance to move toward intermediate and shorter maturities, which could raise rollover risk for issuers. Matt Maleri, head of insurance at NEPC, said plans are selling long-duration holdings and buying in the belly of the curve, though many will continue to hold long-duration debt.
At the portfolio level, Gross said the higher funded status means hedges need to work less hard, enabling a holistic "portfolio stabilization" approach. Matt Clink of Aon described its "enhanced LDI" strategy, which includes investment-grade private credit, private real estate debt and collateralized debt as hedging assets because they offer higher yields than investment-grade corporate bonds. Clink said these assets offer monthly liquidity, although exiting private credit or real estate debt positions can take multiple quarters.
For managers, Maleri said NEPC sees many plans retaining their current managers while changing mandates toward intermediate duration. Plan sponsors may need specialist firms for nontraditional hedges, and sponsors may also split custom blended benchmarks among multiple managers covering different parts of the yield curve, an approach Gross said could suit larger hedge programs.
NEPC's annual Corporate Defined Benefit Peer Study and Survey, released in April, showed that plans did not de-risk further in 2025, with average fixed-income allocations in the consultancy's peer group roughly unchanged year over year. Some sponsors are exploring nontraditional LDI diversifiers, including private placements, structured products and real estate debt. NEPC reports that 37% of surveyed plans use at least one of these asset classes for hedging.
The shift carries implications for bond markets. Pension funds were significant buyers of long-duration U.S. Treasuries and corporate bonds, and if they become less price-insensitive buyers, demand at the long end could soften. Jared Gross, head of institutional portfolio strategy at J.P. Morgan, said plans will need more intermediate-maturity credit and government bonds and fewer Treasury STRIPS or interest-rate hedges, though the need for long-dated products will not disappear. He added that modest pension demand shifts are unlikely to be the primary driver of Treasury yields. Liying Wang of the University of Nebraska-Lincoln expects corporate issuance to move toward intermediate and shorter maturities, which could raise rollover risk for issuers. Matt Maleri, head of insurance at NEPC, said plans are selling long-duration holdings and buying in the belly of the curve, though many will continue to hold long-duration debt.
At the portfolio level, Gross said the higher funded status means hedges need to work less hard, enabling a holistic "portfolio stabilization" approach. Matt Clink of Aon described its "enhanced LDI" strategy, which includes investment-grade private credit, private real estate debt and collateralized debt as hedging assets because they offer higher yields than investment-grade corporate bonds. Clink said these assets offer monthly liquidity, although exiting private credit or real estate debt positions can take multiple quarters.
For managers, Maleri said NEPC sees many plans retaining their current managers while changing mandates toward intermediate duration. Plan sponsors may need specialist firms for nontraditional hedges, and sponsors may also split custom blended benchmarks among multiple managers covering different parts of the yield curve, an approach Gross said could suit larger hedge programs.
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