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Defined benefit plans have entered a new era of surplus, but what happens next is where the real opportunity begins. Surplus does not have to be a one-time windfall. With the right strategy, it can become a long-term asset.

After years of low interest rates and funding pressures, many plans now find themselves in surplus, driven by rising discount rates and strong equity market performance. Before spending surplus assets, however, we believe plans should focus on managing them strategically on the balance sheet to create lasting economic value for both sponsors and participants.

That value can take many forms. Examples include enhancing retirement benefits for future or past service, strengthening solvency in situations such as retiree medical obligations or mergers and acquisitions, and generating GAAP pension income while avoiding costly settlement charges. Innovative defined benefit strategies are increasingly evolving to share risks and rewards more equitably, helping ensure benefit security while still providing upside potential for sponsors and retirees.

We believe that effective surplus management begins with first principles. The primary focus should be on ensuring benefit security and reducing dependence on future sponsor contributions. From there, the goal is to capture affordable upside opportunities without taking excessive risk.

Successful implementation requires disciplined execution. In our view, the essential first step is to clearly define surplus objectives and establish strong governance frameworks. Ongoing risk monitoring is then necessary to ensure progress toward those objectives. The second step involves defeasing benefits by investing a portion of assets directly against liabilities. This includes hedging economic sensitivities to lock in outcomes, generating liquidity to meet benefit payments, and seeking asset growth by targeting yields aligned with the liability discount rate.

These measures help place a plan on a path toward securing the benefits owed to retirees. Once those obligations are well protected, attention can shift to growing excess assets. Investing surplus assets requires striking the right balance between stability and growth. Fixed income investments can provide greater clarity, a degree of certainty, and attractive yields, while return-seeking assets offer growth potential but come with higher levels of volatility.

There is no one-size-fits-all solution, which makes finding the right balance critical. That is where an experienced partner can make a significant difference. At Insight, our heritage in liability-driven investing, surplus management, and solution design gives us extensive experience in helping clients navigate these decisions.

Managing surplus is about more than simply maintaining a funding level. It is about unlocking value for both the organization and the people who depend on it. With the right strategy, a plan's surplus can become a long-term asset that delivers enduring benefits. If you are interested in discussing this topic further, please contact us.