You’ve done a good job making sure that the pension plan is fully funded. So good, in fact, that you — and the plan — are overachievers and the plan is fully funded and then some. And THAT surplus spells…opportunity.

The Grist

Funding of pension plans generally has been on an upward trajectory for a number of years.

The improvement in funded status has been dramatic, yet incremental. Willis Towers Watson’s figures show as much: they show that the funding of a hypothetical benchmark pension plan they track stood at approximately 68% funding in the first quarter of 2015 and rose ever since. Funding levels occasionally fell from one month to the next along the way, but the level to which they fell was never less than that of early 2015, with the exception of the 67% of the second quarter of 2020, and those declines didn’t last more than one month. By Sept. 30, 2025, WTW reported a funding ratio of 126.4%.

Milliman concurs. Their statistics concerning the funding of the plans run by the 100 U.S. public companies with the largest amount of pension plan assets show a general increase since 2012, also with occasional short-lived dips.

The plans Milliman tracks hit a surplus beginning in the first quarter of 2021. The funding ratio in mid-2020 was 82%, and stood at 106% by the end of September 2025.

By now, says Capital Group, some plan sponsors have become accustomed to “a state of sustained overfunding and even financial independence” as well financially independent plans.

Opportunity

The extended — and growing — pension funding surplus offers “new opportunities for plan sponsors,” says Milliman. The organization Accounting Insights observes that when a pension plan finds itself in such a position, there are several options for managing the surplus. So does Capital Group, which notes that the “enviable position” of overfunding creates “a new set of decisions” for plan sponsors that enjoy being flush with funds.

Milliman says many plan sponsors are seizing that opportunity and considering what actions they can take.

So if a plan is overfunded, what are those options? Analysts offer some ideas.

Pass it Along

One option is to pass the excess funds on to participants by enhancing benefits, suggests Accounting Insights. For instance, they could do so by increasing cost-of-living adjustments (COLAs) or offering lump-sum payouts.

Another way to accomplish that would be to enhance benefits, suggest Accounting Insights and Capital Group. The latter notes that this could be accomplished by reducing employer contributions to a 401(k) plan while simultaneously granting new or increased cash balance pay credits from the overfunded pension plan.

Adjusting contribution requirements is another option, say Accounting Insights and Capital Group.

The former suggests that overfunding provides a plan sponsor with the opportunity to reduce employee contribution requirements. Accounting Insights argues that this would reduce the surplus and also improve participants’ retirement security.

The latter advocates reducing employer contributions to a 401(k) plan while simultaneously granting new or increased cash balance pay credits from the overfunded pension plan.

Offset Future Contributions

Some employers that have overfunded plans use that excess to offset future contributions, says Accounting Insights. They note that doing so can:

• • • reduce cash outflows;
    • maintain plan stability;
    • help manage liquidity; and
    • allow reinvestment of capital.

Re-Risking

Capital Group argues that a pension plan may reach a point at which it can re-risk plan investments within the parameters of fiduciary obligations.

Reversion

Companies may recapture surplus funds through a reversion, which withdraws excess assets from the plan, says Accounting Insights. They note that this response is usually pursued only when a plan is terminated and has no liabilities left to satisfy. They add that reversions are rare due to the associated tax implications.

Terminate the Plan

If a plan sponsor is considering terminating its overfunded plan, Capital Group suggests that it think about whether the “relative likelihood” of a financially independent plan improving its status even more than it already has outweighs the risk of its funding falling to such an extent that the plan becomes underfunded.

Be Careful

A plan sponsor that seeks to use some of the overfunding and draw down a surplus needs to exercise caution, analysts suggest.

Accounting Insights, for instance, reminds that in enhancing benefits as a result of overfunding, a plan sponsor must be sure to comply with plan provisions. In addition, they suggest, one should take action in such a way as to avoid funding shortfalls in the future.

A plan sponsor also should be mindful of applicable regulations, Accounting Insights suggests. “Funding regulations influence how companies manage an overfunded pension plan,” they caution. Among them are ERISA and Internal Revenue Code (IRC) Section 420, which address how and when surplus funds can be used.

Capital Group warns of the risk of running afoul of requirements related to employer contributions and variable rate Pension Benefit Guaranty Corporation premiums. They suggest that plan sponsors can minimize those risks by employing de-risking plans and investment strategies.

 

 

 

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