With elevated funded levels in recent years, there has been an uptick in pension risk transfer activities including plan terminations. Furthermore, for plans without an immediate desire to terminate their pensions, plan sponsor hibernation objectives are causing shifts in investment strategies. The degree of preparation for these activities is highly correlated with the ease of execution. We will review several best practices to prepare for plan termination or hibernation.

Plan Termination

According to the LIMRA Secure Retirement Institute (2025), United States 2024 annuity buyout transfers totaled $51.8B, with a record 794 contracts sold during the year. With elevated funded levels in recent years, many frozen plans took action to offload liabilities through full plan terminations. These best practices emerge in the activity leading up to plan termination:

  • Clean up data

An important consideration with plan terminations is having clean participant level data. Ahead of the actual transaction, this data will be utilized to determine final benefit amounts, send relevant notices and election packages to participants as well as insurance companies pricing the cost of taking on the liabilities. If data is missing or not clean, plan sponsors can experience communication gaps as well as increased costs.

  • Clean up liabilities

As opportunities present themselves, it is good practice to review the liabilities and determine if any ad-hoc settlements, either through lump sums or small annuity buyouts (for a portion of the retiree population) would be beneficial to the plan in advance of a full plan termination. Administrative cost savings (such as PBGC premiums) has been a significant factor driving this activity.

  • Clean up assets

If plan termination is an objective for the plan, it is important that the investment strategy minimizes surprises in termination costs. To achieve this, consider shifting assets to a custom, liability-driven investment strategy where assets earmarked for an annuity purchase are in bond investments that align with the liability. Larger plans that have a custom individual bond portfolio can reduce costs at termination by transferring securities in-kind to an insurance company instead of liquidating and sending cash. Several insurers prefer assets in-kind when sizeable (above ~$100M) and may provide discounts to the annuity premiums.

  • Don’t delay clean-up

Whether preparing the investment portfolio, providing ad-hoc settlements or cleaning up data, an earlier start, sometimes years ahead of termination activity, will create a more manageable process and outcome at termination. We have observed changes in termination objectives after unexpected favorable results in capital markets or plan sponsor cash availability that caused acceleration in terminations for some plan sponsors. Being prepared in these three areas helps ease the process.

Plan Hibernation 

An alternative to plan termination is hibernation, which involves implementing a de-risked investment strategy that effectively locks in the plan’s funded ratio. Well-funded plans with no near-term desire to terminate may find these best practices for hibernation useful: 

  • Clean up assets

Once a frozen plan reaches full funding status or an overfunded status, an investment strategy that minimizes swings in funded status is often desired. A portfolio that has a heavy allocation (typically 90% or more) in bond investments aligned with the liabilities helps to achieve this. For sizeable plans, a well-designed portfolio of individual bonds will provide the lowest tracking error relative to the liability. Careful consideration is made to how the liability is measured, projected cashflows over the life of the plan and duration risk across the yield curve. Once this portfolio is implemented, the plan should see minimal swings in funded status regardless of market volatility.

  • Clean up actuarial assumptions

One consideration often missed with plan hibernations are actuarial assumptions. The IRS funding rules allow for flexibility in how assets and liabilities are measured with some measures more balanced than others. For a well-funded plan invested primarily in liability hedging fixed income, it is best practice to utilize a marked to market approach in measuring the assets and liabilities to the greatest extent possible. The IRS rules allow for use of a full yield curve with minimal smoothing / averaging for measuring the liabilities, which moves more in line with the assets. On the asset side, market value of assets can also be used instead of utilizing up to two years of averaging permitted. These assumptions will provide the least amount of funded status volatility and more predicable financial outcomes for hibernating plans.