Are most pension plans really close to being ‘fully funded’?

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With the increase in interest rates leading to an improvement in funded status for the majority of frozen corporate defined benefit plans, these plans are ever closer to their goal of plan termination.   This path to termination calls for a coordination of contribution strategy, investment strategy and liability management.  However, if the plan termination funded status is not accurate it can lead to a multitude of issues such as taking excessive investment risk, over-funding the plan, or burdening the plan sponsor with additional administration expenses.

Based on our experience with pension plan terminations, the corporate defined benefit industry has a systemic problem: the funding level estimates given by many service providers are simply inaccurate. In cases we have reviewed, plan sponsors are being told that their termination basis funding levels are significantly lower than they actually are. Said another way, many plan sponsors are much closer to being able to fully settle their plan liabilities than they are being told.