A glidepath written to reach full funding by 2030 does not pause and recalibrate when a plan arrives in 2026 instead. It executes the next scheduled equity-to-bond sale on schedule, four years ahead of the assumptions that sized it.
Milliman's 100 largest corporate DB plans closed the second quarter at 109.5% funded, on a $41 billion asset gain against just $2 billion of liability growth (Milliman, July 2026). That lopsided gain is pulling automatic de-risking triggers forward.
Key Takeaways
- $41 billion of asset gain against $2 billion of liability growth is the wrong shape for a glidepath calibrated to expect rate-driven liability compression to do roughly half the work.
- The discount rate moved 9 basis points over the trailing twelve months to May 2026 while the funded ratio went from 104.2% to 109.6% on a 13.15% cumulative return.
- Fixed income already reached 52.7% of assets at the largest plans at fiscal year-end 2025, against a 24.1% equity share, so terminal allocations are arriving ahead of their modeled timelines.
- Competitive-bid buyout cost fell to 99.6% of accounting liability in June, with bidding saving sponsors about 3.0%, which is settlement pricing below the assets held against the liability.
- A pessimistic scenario of 2.61% returns with rates falling to 4.67% puts the funded ratio at 94% by year-end 2027, against a base case of 111.5% and a $137 billion surplus.
The Trigger Is an Instruction, Not a Suggestion
Glidepaths are mechanical by design. A sponsor sets funded-status bands in an investment policy statement, and crossing a band triggers a scheduled reallocation from growth assets into liability-hedging fixed income, executed by the plan's fiduciary or outsourced CIO without a fresh board vote. The point is to remove market-timing discretion from a decision that should be actuarial.
A typical structure specifies targets by band: perhaps 60% return-seeking below 80% funded, stepping to 40% at 90%, 25% at 100%, and 10% to 15% once the plan clears 110%. Each crossing is an instruction to sell equities and buy long-duration bonds or Treasury STRIPS until the new weight is reached, pre-committing the sponsor to selling risk into strength rather than waiting for more upside and riding the next drawdown back through the band.
The quarter delivered exactly that strength. The Milliman 100 gained 4.81% in investment return alone, carrying the funded ratio from 108.2% in April to 109.6% in May before a June dip trimmed $2 billion off the surplus. Liabilities barely moved, with the discount rate slipping one basis point to 5.61%.
Duration mechanics tighten as the plan de-risks. At 80% funded with 60% growth assets, a plan tolerates real mismatch between bond and liability duration, because equity returns are closing the gap. At 105% to 110% funded with 15% growth assets, the fixed-income sleeve carries almost the entire funded-status outcome, and its duration against the liability's becomes the dominant source of month-to-month volatility.
The Glidepath Was Calibrated for the Other Leg
Most glidepaths in force were designed or last recalibrated between 2019 and 2022, when discount rates sat in the 2.5% to 3.5% range and median large-plan funded ratios ran 85% to 95%. The embedded assumption was that closing the gap would blend equity outperformance with a gradual normalization of rates lifting the discount rate and shrinking the present value of the liability.
That is what happened from 2022 through 2024, when the rate-hiking cycle compressed liabilities and carried the Milliman 100 from roughly 96% funded at the end of 2021 past 100% by 2023. What those vintages modeled less heavily is a second leg driven almost entirely by asset returns after rates had stabilized.
That is the leg the market is in now. The discount rate moved 9 basis points lower over the trailing twelve months to May 2026 while the funded ratio improved from 104.2% to 109.6% on a 13.15% cumulative return. A glidepath expecting roughly half its triggers from rate-driven compression is seeing nearly all of them from asset growth, and asset growth is the scenario with the least natural hedge behind it: a return-seeking portfolio that outperforms can underperform as fast, while a liability that has stopped moving will not rescue the plan on the way down.
| Assumption | 2019-vintage glidepath design | Mid-2026 reality |
|---|---|---|
| Discount rate at design | ~2.6% to 3.3% | 5.61% (Milliman PFI, June 2026) |
| Expected path to full funding | Gradual, rate-driven liability compression plus moderate equity return | Asset-driven: 13.15% trailing 12-month return vs. 9 bps of discount-rate movement |
| Typical fixed-income share at trigger | Modeled to rise gradually over 5 to 8 years | Already at 52.7% for the largest plans at FY2025 year-end, up from 24.1% equity share |
| PRT settlement pricing assumption | Buyout at premium to ABO (105% to 110% historically typical) | Competitive-bid buyout at 99.6% of ABO (Milliman PBI, June 2026) |
Hedge ratios carry the same vintage problem. A plan that locked an 80% hedge ratio in 2019, when the 30-year Treasury yielded near 2.6%, built it from STRIPS and long corporates priced against a very different environment than the 5.61% rate underlying today's obligation. Fixed income has since reached 52.7% of total assets at the largest plans, up from 52.2%, and the completion trade filling the duration gap with futures or swaps was calibrated on 2019-era convexity and cash flow assumptions.
The failure mode is a ratio that overshoots or undershoots by a margin nobody sees until remeasurement. Overshoot arrives when duration was extended to match a liability assumed under lower rates, and lump-sum elections or a partial buy-in have since removed longer-duration deferred liability. Undershoot arrives when a legacy 80% ratio is effectively delivering 65% to 70% coverage against the current liability because the original duration and convexity assumptions have drifted. Neither shows on a monthly funded-status report; both need a liability cash flow analysis rather than a rebalance to target weights.
Two Clocks, and the Slower One Holds the Surplus
The trigger and the settlement decision run on incompatible timetables. A glidepath reallocation executes within days through the fiduciary manager's standing authority. A pension risk transfer needs RFP preparation, insurer due diligence under the Department of Labor's Interpretive Bulletin 95-1 selection criteria, participant data cleanup, and months from mandate to close.
The pricing makes the gap expensive. Competitive-bid buyout cost fell from 99.7% to 99.6% of accumulated benefit obligation during June, with the bidding process saving an estimated 3.0% against the average bid received (Milliman Pension Buyout Index). A plan at 109.5% funded on a projected benefit obligation basis, facing settlement at 99.6% of a narrower accounting measure, can often transfer retiree liability at a price below the assets held against it.
A plan already de-risked to a 10% to 15% growth allocation is operationally closer to ready, since the insurer is bidding on a portfolio the sponsor already made safer. But if the settlement process has not started separately, the automatic de-risking parks the plan in a low-return, fully hedged posture for a year or more, giving up the return-seeking assets without capturing the settlement gain the window offers. "Stronger funding has many plans preparing for their next derisking threshold, while some are taking a step back to evaluate their surplus goals," notes Wellington's LDI team.
The reversal case is what makes the parking costly. Milliman's pessimistic scenario, 2.61% returns with the discount rate falling to 4.67%, puts the funded ratio at 94% by year-end 2027, erasing the surplus, against a base case of 111.5% and a $137 billion surplus at a 6.61% expected return. A plan that has executed its terminal reallocation has less capacity to earn its way back, because the assets that would do the earning are already sold.
That trade is the glidepath working as intended; hedging at high funded status exists to lock in a surplus rather than keep speculating on it. The exposure is that a trigger firing years early leaves the surplus hedged but not settled, and the governance record thin: a committee reviewing a reallocation executed well outside the model that justified it has to confirm contemporaneously that the policy statement never conditioned execution on the pace at which the band was reached.
Further Reading
- Corporate Pensions Close Q2 2026 in Surplus: The Endgame Math: The settlement-accounting and reversion mechanics behind the same Q2 2026 funded-status data.
- Competitive PRT Cost Falls Below ABO: Decision Framework for DB Plan Sponsors in 2026: How the sub-par buyout pricing referenced above changes the settlement decision.
- Longevity Swaps Fill the De-Risking Gap for Plans Too Large for the Buyout Market: A partial de-risking alternative for plans not ready for full settlement.
- DB Plans at 109% Funded Face Record PBGC Premium Pressure: The premium-cost side of the same funded-status inflection.
- Retirement and Pension Actuarial Outlook 2026: The broader pensions and ERM landscape this glidepath analysis sits within.
Sources
- Milliman, Pension Funding Index, June 2026
- Milliman, 2026 Corporate Pension Funding Study
- Milliman, Pension Buyout Index analysis, competitive PRT cost decreased to 99.6% during June (July 2026)
- Wellington Management, "LDI in 2026: 10 Questions for 2026"
- U.S. Department of Labor, Interpretive Bulletin 95-1 (annuity provider selection)