A funded ratio is a comparison of two independently priced instruments: a portfolio of assets marked at fair value and a liability discounted at a corporate bond yield that moves with the market. When both move in the sponsor's favor in the same quarter, a surplus stops being a snapshot and starts being a position to manage. The Milliman 100 Pension Funding Index closed June 2026 at 109.5% funded, with $1.323 trillion in assets against $1.208 trillion in liabilities, a $115 billion cushion built largely on a 4.81% second-quarter investment return (Milliman Pension Funding Index, June 2026).
The Second Quarter's Arithmetic
The quarter did not move in a straight line. Plan assets gained $41 billion between April and June while liabilities crept up by only $2 billion, a combination that pushed the funded ratio from where it started the year, 106.1%, to the 109.5% close (Milliman Pension Funding Index, June 2026). June itself broke that pattern: the discount rate ticked down one basis point to 5.61%, investment returns slowed to 0.42% for the month, and the funded status surplus fell by $2 billion even as the ratio held near its second-quarter high. "Subpar investment performance combined with rising liabilities caused the PFI funded status surplus to fall during June," said Zorast Wadia, the PFI's author (Milliman Pension Funding Index, June 2026).
That one-month wobble inside an otherwise strong quarter is the detail that matters for endgame planning. A surplus built on a single quarter of equity returns is fragile; a surplus that survives a month of below-trend markets and a rate dip without falling out of triple-digit funded territory is closer to durable. Milliman's own scenario work treats that distinction explicitly, projecting the funded ratio to reach 116% by year-end 2026 and 129% by year-end 2027 under an optimistic path (discount rate rising to 5.91%, 10.61% annual returns), against 105% and 95% under a pessimistic path (discount rate falling to 5.31%, 2.61% annual returns) (Milliman Pension Funding Index, June 2026). The 20-point spread between those two 2027 outcomes is the working range plan sponsors are actually planning against, not the single point estimate the headline ratio implies.
From Deficit Repair to Endgame: Why the Decision Set Changes
Milliman's full-cohort annual study, covering the 100 largest corporate DB plans by asset size at fiscal year-end 2025, tells the same story from a different angle. The aggregate funded ratio for that cohort rose from 101.1% to 103.8%, and the dollar surplus more than tripled, from $13.4 billion to $48.1 billion, on $1.301 trillion of assets against a $1.253 trillion projected benefit obligation (Milliman 2026 Corporate Pension Funding Study). Investment performance did the heavy lifting: the cohort earned an actual 8.80% return against a 6.61% expected long-term assumption, and 75 of the 100 plans beat their own expected-return target (Milliman 2026 Corporate Pension Funding Study). A discount rate that fell 8 basis points, from 5.39% to 5.31%, worked against the surplus by inflating liabilities, and the asset side still won by a wide enough margin to post the second consecutive year of aggregate surplus.
Two consecutive years of surplus changes what an actuary is solving for. A plan climbing out of a deficit is optimizing around minimum required contributions, PBGC variable-rate premium exposure, and funded-status volatility that threatens covenant or rating triggers, a dynamic covered in actuary.info's earlier analysis of PBGC premium pressure at record-high funded status. A plan sitting on a durable surplus is instead choosing among distinct end states: keep the plan frozen and manage it as a standalone asset ("hibernation"), reopen it in a redesigned form ("thawing"), wind it down entirely through termination, or repurpose part of the surplus for a different benefit (Milliman, "Frozen pension plan with a surplus? Four strategies," 2026). Each path has a different cost structure, and the funded ratio alone does not tell a sponsor which one is economically superior; the discount-rate sensitivity of the liability does.
Settlement Accounting: Where Buyouts and Lump Sums Crystallize Gains and Losses
Settlement accounting under ASC 715 is the mechanism that converts a paper surplus into a recognized income statement event. A settlement is triggered once the irrevocable, non-recourse transfer of pension obligations, typically through an annuity purchase or a lump-sum window, exceeds the sum of a plan's annual service cost and interest cost for the year. Below that threshold, sponsors can elect to amortize the accumulated actuarial gain or loss embedded in accumulated other comprehensive income (AOCI) over the remaining service period; above it, the entire pro-rata share of that unrecognized gain or loss must be recognized immediately in earnings.
This is why partial de-risking is a deliberate accounting choice, not just a risk-management one. A sponsor sitting on a large unrecognized actuarial gain, common after several years of asset outperformance and discount-rate volatility, can time a lump-sum window or a partial annuity buyout to fall just under the settlement threshold and defer recognition, or push deliberately over it to accelerate a gain into current earnings. Full plan termination forces the issue: every dollar of AOCI gain or loss is recognized the moment the final annuity contract is purchased and the trust is closed. Despite the strong funded backdrop, sponsors pulled back on settlement volume in fiscal 2025: pension risk transfer payouts across the Milliman 100 companies totaled $12.6 billion, down from $23.4 billion in fiscal 2024, with annuity purchases and lump-sum windows the primary vehicles (Milliman 2026 Corporate Pension Funding Study). That slowdown, arriving in the same year the aggregate surplus more than tripled, suggests sponsors treated 2025's gains as still provisional rather than a trigger to lock in settlement pricing, a pattern actuary.info has tracked in competitive PRT buyout pricing relative to accounting liability.
The Discount-Rate Sensitivity That Could Erase the Surplus
The $115 billion June surplus equals roughly 9.5% of the $1.208 trillion liability base, which means a liability-side move of similar magnitude, with assets held flat, would wipe it out entirely. Large frozen and closed corporate DB plans typically carry effective liability durations in the 10-to-12-year range, so as a rough approximation, each 10-basis-point decline in the discount rate raises the liability by roughly 1.0% to 1.2%, or $12 billion to $14 billion at the current $1.208 trillion PBO. On that math, an 80-to-95-basis-point drop in the discount rate, absent any offsetting asset return, would be enough to erase the entire cushion. That is a large move for six months but not an implausible one over a full year: Milliman's own pessimistic scenario embeds a 30-basis-point rate decline paired with a weak 2.61% return path, and it still only pushes the funded ratio down to 105% by year-end 2026 because the return assumption, not the rate move alone, dominates the outcome (Milliman Pension Funding Index, June 2026).
Wadia flagged this asymmetry directly when discussing the June dip, warning that the real risk sits in a compounded scenario rather than an isolated bad month: "What if what happened this month actually happened to a larger extent?" he asked, pointing to "sustained, declining interest rates, coupled with a market downturn" as the combination that would matter (Milliman Pension Funding Index commentary via PLANSPONSOR, June 2026). That is precisely the pessimistic leg of Milliman's own scenario cone, and it is the reason a funded ratio measured at a single month-end is a weaker planning input than the sensitivity of that ratio to a joint rate-and-return shock.
Duration Matching as the Mechanism That Protects a Surplus
Liability-driven investing closes the gap identified above by holding a fixed-income portfolio whose duration and cash flow profile mirror the liability's, so that a discount-rate move that inflates the liability produces a roughly offsetting mark-up in the bond portfolio's value. The asset-allocation data in Milliman's fiscal-2025 cohort study shows that shift in progress: equity allocations fell to 24.1% of assets from 24.7% the prior year, while fixed income rose to 52.7% from 52.2% (Milliman 2026 Corporate Pension Funding Study). That is a modest half-point rotation, not a wholesale glide-path completion, and it is consistent with a cohort still holding meaningful growth-asset exposure even after two years of surplus. A plan fully immunized against the discount-rate risk described above would need its fixed-income duration matched close to the liability's 10-to-12-year effective duration, materially longer than a typical core-bond benchmark, which is why de-risking glide paths built for this purpose lean on long corporate credit and STRIPS rather than aggregate bond indices.
The tradeoff is return give-up: a fully duration-matched portfolio forfeits the equity risk premium that produced the 8.80% actual return against a 6.61% expectation in fiscal 2025 (Milliman 2026 Corporate Pension Funding Study). For a sponsor already committed to termination or a near-term full buyout, that tradeoff is close to costless, since the plan will not hold assets long enough for the growth premium to compound. For a sponsor choosing hibernation over a multi-year horizon, it is a live decision between locking in the current 109.5% funded position and continuing to bet on returns to widen it further, with the discount-rate math above setting the downside boundary on how much the wager can lose.
Termination, Hibernation, and Thawing: The Cost Trade-Offs
| Path | Mechanism | Surplus treatment |
|---|---|---|
| Hibernation | Plan stays frozen; LDI and de-risking triggers manage the surplus in place | Retained, subject to ongoing PBGC premiums and market risk |
| Thawing | Plan reopened, often redesigned as a cash balance formula | Redeployed into new accruals rather than distributed |
| Termination | Full annuity buyout or lump-sum settlement closes the plan | Reverted to sponsor (taxed) or transferred to a QRP or benefit increase |
| Section 420 transfer | Excess above 125% funded moved to fund retiree health or life benefits | Repurposed, one transfer per taxable year |
Termination is the path where the discount-rate sensitivity above meets tax law directly. Under Internal Revenue Code Section 4980, any surplus assets that revert to the sponsor upon plan termination face a 20% excise tax at minimum, rising to 50% unless the employer establishes a qualified replacement plan (QRP) or increases participant benefits. Relief from the 50% rate requires transferring at least 25% of the potential reversion amount into a QRP, or applying at least 20% of the excess to benefit increases within the terminating plan (IRC Section 4980; Mercer, "Using a qualified replacement plan to reduce excise tax on DB plan surplus"). On a $115 billion aggregate surplus, the difference between the 20% and 50% rates is the difference between roughly $23 billion and $58 billion in tax leakage industry-wide if reversion were pursued without mitigation, which is why full terminations rarely target a large reversion and instead settle liabilities close to par, leaving PRT buyout pricing itself, not the excise tax, as the binding cost.
Thawing is the least common path but the one with the clearest precedent: IBM's return to defined-benefit accruals used a cash-balance design rather than reopening its traditional final-average-pay formula, a structure now used by roughly half of all active DB plans, up from about 15% in 2010 (Milliman, "Frozen pension plan with a surplus? Four strategies," 2026). A cash balance redesign lets a sponsor redeploy surplus into new accruals without the excise tax exposure that attaches to a cash reversion, since the assets never leave the trust. The Section 420 transfer sits at the narrow end of the toolkit: it only becomes available once a plan is funded above 125% of its liabilities, is capped at one transfer per taxable year, and is earmarked specifically for retiree health or life insurance benefits rather than general corporate use, which limits it to the subset of sponsors carrying both a well-funded pension trust and a retiree medical obligation to fund.
What the Scenario Cone Implies for 2026-2027 Timing
Milliman's own forward range, 105% to 116% funded by year-end 2026 and 95% to 129% by year-end 2027, is wide enough that a sponsor waiting for certainty before acting on an endgame decision may be waiting for a signal that never arrives (Milliman Pension Funding Index, June 2026). The pessimistic leg is the more instructive one for timing purposes: it shows the funded ratio falling back below 100% by the end of 2027 under a combination of declining rates and a 2.61% return environment, which would be enough to push a plan currently comfortable with termination back into a marginal or underfunded settlement decision. That asymmetry, a surplus that can compound quickly in an optimistic scenario but can also fully invert within 18 months in a pessimistic one, is the actuarial argument for treating mid-2026 as a decision point rather than a status update. Sponsors that lock in duration matching or execute settlement transactions while the funded ratio sits comfortably above 105% capture the surplus while it exists; sponsors that wait on the assumption the 109.5% level is a floor are underwriting the pessimistic scenario without pricing it.