How Benefit Payments are 'Lifting” Funded Status to New Heights

by Justin Owens of Russell Investments, 10/17/25

Key takeaways

  • Benefit payments can help or hinder a pension’s plan funded status.
  • Overfunded plans gain from “benefit payment lift,” which increases their funded status. Today, roughly half of all plans are overfunded.
  • As funded status rises, the idea of plan hibernation may become more attractive, enabling strategic use of pension surplus.

I recently visited the Smithsonian Air & Space Museum with my 11-year-old son, where we saw the original plane flown by the Wright brothers in 1903. The plane was larger than I expected, and the first flight was shorter than I thought, but somehow, they managed to crack the code on how to make a machine fly. They did this by overcoming significant opposing forces.

A plane trying to take off has two main obstacles to overcome: weight and drag. Weight is forced by gravity and drag by air resistance. Planes overcome these factors with thrust and lift. Thrust comes from powerful engines and lift from the wings.

Ironically, both drag and lift are caused by air, which can either resist a plane’s motion or help it rise. Pension plans also face forces that either hold them back or propel them forward: obligations, contributions and investment returns.

The weight of obligations

The weight of a pension plan is the future obligation to pay benefit payments. It weighs less when rates are higher (as they were in 2022) but more when they are lower (protected by LDI strategies). Thrust comes from contributions and investment returns. A larger engine is like a more generous funding policy or aggressive asset allocation. Drag and lift also have their analogs, both arising from the payment of benefits. Most recently, more plans are experiencing the lift.

When payments hold you back

Underfunded pension plans face a significant challenge to becoming fully funded, simply because they are always paying out benefit payments. Pension risk transfer can magnify this problem. What we refer to as “benefit payment drag” comes from paying out a higher portion of assets than liabilities. Benefit payments are paid out at a 100% level whether the plan is fully funded or not. This means when an underfunded plan pays benefits, its funded status decreases.

Let’s take a simple example. A plan has $400 million in assets and $500 million in liabilities, or an 80% funded status. Now, what if it pays out $100 million in benefit payments? The plan is left with $300 million in assets and $400 million in liabilities. Its funded status percentage drops by 5% and is now 75% funded. That’s benefit payment drag, and it requires added “thrust” (i.e., returns or contributions) to overcome. The low funded status causes effective returns to be throttled down.