Higher Discount Rates, Reduced Liabilities Improve December Pension Funding

Pension finances ended 2025 on a high note, as the funded status of the largest 100 corporate defined benefit plans improved for the ninth consecutive month in December 2025, according to Milliman’s Pension Funding Index.

Funded ratios ended the year at 108.1%, up from 107.1% in November 2025 and 103.6% at year-end 2024, Milliman reported. Plan assets increased by $53 billion over the year, while liabilities decreased by $1 billion. The net improvement of $54 billion brought the year-end funding surplus to $98 billion.

MetLife Investment Management estimated that the average U.S. corporate pension funded status rose to 106% in December 2025, up only 0.6 percentage points from 105.4% in December 2024.

“If you were to look at the bookends of [the year], then you might think there was not a lot of action,” says Jeff Passmore, MetLife’s liability-driven-investing-solutions strategist and co-author of the firm’s quarterly pension funding report. “But there was more than those two endpoints would lead you to believe.”

The first quarter of 2025 was marked by market volatility, with a steep funded ratio drop to 104.8% at the end of February from 106% at the end of January, according to Milliman. The first quarter suffered from a severe equities downturn. However, the three ensuing quarters lifted pension finances out of their Q1 rut.

Passmore says the primary driver of last December’s improvement was a 15-basis-point increase in discount rates.

“Discount rates went up, liabilities went down, funded status went up,” says Passmore. “All very modestly.”

Passmore adds that while equity markets have received a lot of attention, corporate pensions have diversified significantly. He says MetLife has estimated that bonds have become the majority asset allocation for Russell 3000 companies for the past three years—what he calls part of a general de-risking trend.

Improvement Across the Board

Both model plans tracked by October Three Consulting gained ground in December. Plan A, a traditional 60/40 equity/bond allocation, improved 1%, ending the year up 7%. The more conservative Plan B, comprised of 80% bonds, rose a fraction of 1%, ending 2025 up almost 2% over the year.

Stock performance was mixed in December, though returns were high for most of 2025, says Brian Donohue, a partner in October Three. Bond yields ended the year slightly lower at short durations and moderately higher at very long durations. Bonds lost between 1% and 2% in December but gained between 5% to 6% for the year.

WTW reported that of the 349 Fortune 1000 companies that sponsor U.S. defined benefit plans and have a December fiscal year-end date, their aggregate pension funding status improved to 104% in 2025, up from 101% at year-end 2024. Pension obligations declined slightly to $1.11 trillion at the end of 2025 from $1.16 trillion at year-end 2024, while pension assets finished the year at $1.16 trillion,  driven by overall investment returns of 11%. Domestic large capitalization equities increased by 18%, while domestic small/mid-capitalization equities rose by 12%. Long corporate and long government bonds, typically used in liability-driven investing strategies, gained 8% and 6%, respectively, according to the analysis.

Mercer found that the aggregate funding level of pension plans sponsored by S&P 1500 companies increased to 110% on December 31, 2025, from both 109% one year earlier and one month earlier. The firm reported that 2025 saw double-digit gains in domestic equity markets and an approximately 13 bps decrease in interest rates, culminating in a $146 billion surplus, up $11 billion from one year prior.

L&G Asset Management, America also reported an increase in the average pension funding ratio, to 105.7% from 105.2%.

Plan liabilities decreased over the month due to a 9-basis-point rise in plan discount rates, according to L&G. Plans with a 40/60 asset allocation decreased by 0.4%, but liabilities decreased by 0.9%. Equity markets performed well, with global stocks rising 1.07% and the S&P 500 up 0.06%.

Gallagher reported that discount rates increased to 5.61% in December, reflecting a 0.16-percentage-point increase from the end of November and a 0.07-percentage-point rise over the year. After two consecutive months in which the change was less than 0.02 percentage points, December reflected the largest monthly increase in the FTSE Pension Liability Index since March 2025.

Wilshire’s pension finance monitor estimated that the aggregate funding ratio for corporate pension plans sponsored by S&P 500 companies with a duration in line with the Pension Liability Index-Short  increased by 0.9 percentage points to 104.3% in December. Liabilities increased by 1.3 percentage points, partially offset by a 0.6-percentage-point decrease in assets.

Looking Ahead

Defined benefit plans are “maintaining a risk posture that is expected to grow the assets and grow the surplus over time,” Passmore says. “I think we’re going to continue to see [plans] looking for ways to de-risk their financial volatility while continuing to grow their surplus.”

Milliman estimated that if the 100 were to achieve an expected 6.53% asset return and if the current discount rate of 5.46% remains unchanged throughout 2026 and 2027, the pension surplus will be $121 billion (funded ratio of 110%) by the end of 2026 and $143 billion (funded ratio of 111.9%) by the end of 2027.

Under an optimistic forecast with interest rates rising to 6.06% by year-end 2026 and 6.66% by year-end 2027, along with annual asset returns of 10.53%, the funded ratio would hit 122% by the end of 2026 and 137% by the end of 2027. Under a pessimistic forecast, with a 4.86% discount rate at the end of 2026, a 2.26% rate at the end of 2027 and 2.53% annual asset returns, the funded ratio would decline to 99% by year-end 2026 and 90% by year-end 2027.

Notably, since funding improvements are typically reported as averages, some plans still struggle with underfunding.

“While there has been a significant increase in surplus for well-funded plans, it has been more challenging for the funded status of underfunded plans to improve,” said Fred Lamm, managing director of retirement at WTW, in a statement. “Sponsors whose plans aren’t fully funded will want to monitor the potential for required contributions, perhaps getting ahead with planned funding, and examining their investment strategy while being mindful of short-term volatility.”