Two Levers, One Outcome

I often see frozen plans treated as finished once they reach 100% of PBO. The portfolio moves entirely into fixed income, contributions stop, and termination gets pushed out. It looks prudent. It can also lock the sponsor into a plan that slowly loses ground.

My first question is always the same: what would it cost to terminate today? Every plan should know that answer, whatever its funded status. Too often the investment committee takes risk off the table while finance holds contributions to the minimum, and nobody measures what the combination does to the end game.

The 110% rule is outdated

The old rule of thumb says termination costs about 110% of PBO. That number came from a thinner annuity market with fewer insurers and less competition. Today the market is deeper and insurers price longevity and asset risk more precisely. The biggest improvement is on the deferred and active side. Groups that used to carry a heavy load for early retirement options, optional forms, and long duration are now pricing far better than the old rule assumes.

Lump sums have changed the math too. The 417(e) segment rates, prescribed mortality table, and lookback month do not match the accounting assumptions, so a well-timed and well-designed window can settle liability at or below PBO. It also clears out small benefits, which pay the same flat-rate PBGC premium per participant as large ones.

Across hundreds of terminations at Quantum, many annuity placements have come in near PBO and some below it. Not every plan terminates at par, but on a $250 million plan, par versus 110% is a $25 million difference. Before spending years building that cushion, a sponsor should see plan-specific termination projections and indicative pricing.

Time creates a cash cost

Now suppose that same plan sits at 100% of PBO, fully hedged. Even if assets and PBO move together perfectly, the plan keeps paying PBGC premiums and actuarial, administrative, audit, custody, trustee, and investment fees. With no contributions coming in, the trust pays every dollar.

Illustrative cost of waiting

Illustrative only. Assumes assets and PBO otherwise move together; actual results will vary.

Five years of expenses bring funded status down to roughly 97.5%. The hedge worked; time cost the plan about $6.25 million. A sponsor waiting to reach $275 million is moving the other way. LDI hedges liability movement, not the checks written to keep a plan open.

This is not hypothetical. We have seen this exact story several times, far more often than we expected, and nearly always because of a disconnect with the plan's provider. The hedge was managed and the valuation was produced, but no one projected the two together. Sponsors who believed they were sitting safely at full funding were shocked to find their position had deteriorated.

The time horizon should drive the hedge. A PBO hedge can suit a plan held indefinitely, as long as funding covers expense drag. A near-term termination should hedge the settlement liability instead, which insurers price on their own assumptions and often at a different duration than PBO.

It also matters which liability you measure. The PPA funding basis uses stabilized rates and can show no minimum required contribution while the plan is short on an accounting or settlement basis. A zero minimum tells a sponsor what the law requires this year, not what it costs to exit. Funding policy, investment policy, and glidepath triggers should all be measured against the same liability.

De-risking sends an invoice

The same disconnect shows up in underfunded plans on glidepaths, where it can be even more expensive. De-risking is often paired with minimum-only funding and an unspoken assumption that funded status will improve on its own. Every step into fixed income before the plan is fully funded lowers expected return, and the gap that return was supposed to close has to be closed with cash. Removing risk does not remove the shortfall. It locks the sponsor into more long-term cash, or pushes the target date out.

That tradeoff can be worth making, especially for a leveraged or cyclical sponsor that needs protection from a large contribution during business stress. But the sponsor is buying insurance, and the additional expected contributions are the premium.

Put a number on it. Show, side by side, how far the 95th percentile five-year contribution falls, how much expected total contributions rise, and how far the median full funding date moves. Most sponsors still choose the protection. The difference is that now it is a decision.

Also price the cost of carrying the shortfall. The variable-rate premium is $52 per $1,000 of unfunded vested benefits, up to a per-participant cap, effectively a 5.2% annual charge on the unfunded amount. A deductible contribution that reduces it deserves a direct comparison with the sponsor's cost of borrowing.

Model the path, not just the median

Contributions are path dependent. A bad first year can cost more cumulative cash than the same loss in year five, because the shortfall starts amortizing into required contributions immediately and a later recovery does not refund cash already paid in. Two allocations with the same expected return can produce very different cash profiles.

Most of my work is projection work: 10 to 20 years of assets, liabilities, contributions, expenses, and funded status, showing the expected case, the downside, and the recovery. That is where funding, investment strategy, and time horizon finally land on the same page.

Every plan needs an annual termination analysis

Update the termination analysis at least annually, regardless of funded status. Markets, insurer pricing, participant data, and expenses all move. At a minimum, show:

• PBO, PPA funding target, plan-specific termination liability, and total cash to settle
• Projected PBGC premiums and plan expenses
• Expected and downside contributions under current and proposed allocations
• Lump sum window economics and expected time to termination

Refresh it before any major contribution or allocation decision, so finance, the investment committee, and the actuary work from the same view of the end game.

Bottom line

Reaching 100% of PBO is not a signal to fully hedge, stop contributing, and wait. If termination is within reach, finish the job. If it is not, size contributions to the actual gap and time horizon, cover expenses, and set the glidepath against the liability that matters. Funding and investment may be separate policies, but they cannot be separate decisions.