Dear Corporate Pension Actuary: We have an overfunded frozen pension plan that will be terminated at some point, but the timing isn't right for our company this year. What are some options for us now as we prepare for a plan termination?

— Preparing for What's Ahead

Dear Preparing:

For plan sponsors with overfunded frozen defined benefit (DB) plans, several strategies are available to reduce risk and prepare for a future termination—even before the termination process formally begins. According to Milliman's 2025 Corporate Pension Funding Study, more than 35 of the 100 U.S. companies in this annual study had frozen corporate pension plans with excess assets as of year-end 2024. Thanks to recent market performance and interest rate shifts, many corporate DB plans are in a similar situation to yours—and have more options than you might think.

Pension risk transfer before full plan termination

Even if a full plan termination isn't on the table for your company this year, smaller-scale pension risk transfer activities can make a real difference. For example, you may be able to shrink the size of your plan and reduce its volatility over time by implementing in-service distributions, a lump-sum window (which allows eligible participants to take a one-time cash-out of their benefit), or a retiree lift-out (transferring the benefit obligation for a subset of in-pay participants to an insurer through a partial annuity placement). These activities also lower your headcount-based premium payments to the Pension Benefit Guaranty Corporation (PBGC), which is a meaningful ongoing cost savings. In addition, going through smaller risk transfer activities can help clean up the data prior to a full termination. Keep in mind that these transactions do come with one-time fees, and you need to weigh other factors, such as the impact on the eventual full annuity purchase at termination and lost earnings on assets transferred out. That said, a well-timed partial de-risking transaction can be worth the effort as part of a protracted termination strategy.

Merging an overfunded and underfunded pension plan

If your organization sponsors more than one DB plan—for example, separate plans for salaried and hourly populations—and one is overfunded while another is underfunded, merging the two plans may be worth exploring. A merger can use the surplus in the overfunded plan to improve the funded status of the underfunded one. Just know that this kind of move requires careful coordination: Legal counsel should be engaged early to ensure compliance with ERISA and other regulations, any collective bargaining considerations must be addressed, and you’ll have to prepare the necessary plan amendments and filings. In addition, your plan's actuary should assess the projected funding implications, and service providers, such as the trustee, third-party administrator, and investment managers, should be consulted early so they can plan accordingly. Participant communication will also be an important step to ensure a smooth and efficient process.

Paying plan administrative expenses from surplus assets

Although you're planning for the bigger moves, it's also worth reviewing whether eligible plan administrative expenses—such as benefit calculations, annual Form 5500 preparation, PBGC premiums, and certain audit costs—are being paid from plan assets rather than company funds. For an overfunded plan, this is a straightforward way to put some of those surplus assets to work. Consult with legal counsel to confirm which expenses qualify.

Preparing for the future

Additional steps can better position your organization for a pension plan termination within the next few years:

1. Establish a strategy for any surplus assets. A significant concern in the case of an overfunded plan terminating is that the excise tax on an employer reversion in the U.S. is sizeable, along with applicable federal and state taxes. If the plan allows for reversions, this excise tax can be reduced through certain actions, such as using some of the excess to increase plan participants’ benefits (subject to certain rules). Talk to your plan’s legal counsel and actuary to understand the options available for any surplus assets that may remain after plan termination.
2. Reassess the plan’s investment approach. Effective risk management becomes particularly important as termination draws nearer. For example, a liability-driven investment (LDI) strategy can help maintain the plan’s strong funded position until termination. Engage with the plan’s investment advisors to evaluate whether adjustments—such as increasing asset-liability matching or reducing exposure to riskier assets—are warranted in the lead-up to termination.

By addressing both surplus-asset disposition and investment risk early, you can mitigate unexpected costs, protect funded status, and streamline the termination process.

The bottom line: Sponsors of overfunded frozen DB plans have options before termination

If your overfunded frozen plan isn't ready for termination this year, you're not out of options. There are actionable steps you can take now to reduce risk, trim ongoing costs, and set the stage for a smoother termination when the timing is right. Your Milliman actuary can help you evaluate which combination of strategies makes the most sense for your plan's specific situation.

—Your Milliman Actuary

This edition of Dear Actuary was written by Sarah Murray, FSA, EA, MAAA.