New Report Details How U.S. Public Pension Plan Investment Strategies Have Adapted to Meet Changing Market Conditions

Rhea-AI Summary

A comprehensive report by Aon and the National Institute on Retirement Security reveals how U.S. public pension plans have successfully adapted their investment strategies over time. The analysis shows that from 2001 to 2023, pension plans reallocated approximately 20% of their assets from traditional public equity and fixed income to alternative investments including private equity, real estate, and hedge funds. This diversification strategy has proven effective, with pension plans outperforming traditional 60/40 or 70/30 stock/bond portfolios post-2008 Global Financial Crisis, while exhibiting lower volatility. The study highlights how plans evolved from primarily investing in municipal bonds in the 1920s-1930s to adopting more diverse portfolios, particularly during the ultra-low interest rate environment following the financial crisis. The research demonstrates that this strategic diversification has enabled pension funds to consistently meet their investment return expectations and deliver reliable benefits despite changing market conditions.

Positive

• Pension plans successfully diversified portfolios with 20% asset reallocation to alternatives from 2001-2023
• Diversified portfolios outperformed traditional 60/40 or 70/30 stock/bond portfolios post-GFC
• Lower portfolio volatility achieved through diversification strategy
• Pension plans have consistently met or exceeded return expectations over 5 and 10-year periods

Negative

• None.

Analysis from Aon and the National Institute on Retirement Security Finds Public Pension Funds Have Successfully Navigated Economic Downturns by Reallocating Investment Portfolios and Seizing New Asset Class Opportunities

Webinar on June 25 to Review Report Findings

WASHINGTON, June 17, 2025 /PRNewswire/ -- A new report from the National Institute on Retirement Security (NIRS) and Aon examines the changes public pension plan investing has undergone throughout the twenty-first century. After decades of investing primarily in bonds and other fixed income assets, public pension plans have shifted to more diverse investment portfolios, which enabled these funds to grow, deliver reliable benefits, and withstand market turmoil during and after the 2008 Global Financial Crisis (GFC).

These findings are detailed in a new report, Evolution and Growth: How Public Pension Plans Have Diversified Their Investments Amid Changing Markets. The report is authored by Tyler Bond, Research Director at NIRS; Katie Comstock, Partner and Head of Public Sector Solutions at Aon; and John Sullivan, Associate Partner, Asset-Liability Management at Aon.

Read the report.
Register for the webinar on Wednesday, June 25, 2025, at 2:00 PM ET.

"Financial markets are never static, and the broader economy is always changing. Amid this environment, the challenge and responsibility of public pension funds is to adapt and deliver reliable benefits for public service employees. The analysis in this report finds public pension funds in the U.S. have accomplished this mission, even during a period of unprecedented market changes," said report co-author Tyler Bond. "The data shows that, over time, public pension funds have diversified their investment portfolios, allocating capital across public and private equity, real estate, hedge funds, and other alternative assets. This strategic diversification has helped them consistently provide stable and reliable retirement income to workers, even through changing market conditions."

"This analysis of how public pension plans have responded to market conditions illustrates notable drivers of asset allocation evolution and public plan sponsors' ability to adapt" said report co-author Katie Comstock. "The data shows that strategic shifts in asset allocation have helped many public pensions meet return expectations while recovering from major financial shocks. This research reflects Aon's commitment to arming clients with the analytical tools and insights to make confident, forward-looking investment decisions in an ever-evolving market environment."

The report's key insights and analysis are as follows:

• Public pension plans have significantly diversified their portfolios. From 2001 to 2023, the average plan reallocated about 20 percent of its assets from public equity and fixed income into private equity, real estate, hedge funds, and other alternative investments.
  
  
• Public pension plans adopted the prudent investor rule throughout the twentieth century. During their early years in the 1920s and 1930s, U.S. public pension plans largely followed an investing philosophy known as "fiscal mutualism" in which they invested primarily in municipal bonds. By the mid-twentieth century, most plans had adopted the "prudent investor rule" instead. This shift in investment philosophy opened the door for the more diverse portfolios seen today.
  
  
• Pension funds responded to significant changes in financial market conditions. Changes in the broader economy and financial markets, such as the long-term reduction in interest rates and the decline in the number of publicly traded companies, have led plans to adjust their investment portfolios in response to changing market conditions.
  
  
• The decade of ultra-low interest rates was a notable period of transition and change for public plan investments. This fiscal policy decision following the financial crisis had major consequences for how public plans invest.
  
  
• More diverse pension plan portfolios have performed strongly in recent years. When compared to a "traditional" 60/40 or 70/30 public stock/bond portfolio, the diversified portfolios of public pension plans in the U.S. mostly outperformed following the GFC, measured net-of-fees over rolling five-year periods. Moreover, the diversified portfolio exhibited less volatility and greater upside and downside benefits.
  
  
• Public pension plans have met their investment return expectations more frequently since the GFC. When compared to their own return expectations (defined as the actuarial assumed rate of return), U.S. public plans have largely met or exceeded these expectations over rolling five- and 10-year periods that correspond with greater diversification and lower actuarial assumed rates of return. Furthermore, the diversified portfolio met these objectives more frequently than the traditional portfolios.

The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers and the economy as a whole. Located in Washington, D.C., NIRS membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at www.nirsonline.org.

Aon plc (NYSE: AON) exists to shape decisions for the better — to protect and enrich the lives of people around the world. Through actionable analytic insight, globally integrated Risk Capital and Human Capital expertise, and locally relevant solutions, our colleagues provide clients in over 120 countries with the clarity and confidence to make better risk and people decisions that protect and grow their businesses.Follow Aon on LinkedIn, X, Facebook and Instagram. Stay up-to-date by visiting Aon's newsroom and sign up for news alerts here.

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SOURCE National Institute on Retirement Security

FAQ

How have U.S. public pension plans changed their investment strategy since 2001?

Since 2001, public pension plans have reallocated about 20% of their assets from public equity and fixed income into alternative investments including private equity, real estate, and hedge funds

How did AON's pension fund diversification strategy perform compared to traditional portfolios?

The diversified portfolios outperformed traditional 60/40 or 70/30 stock/bond portfolios after the Global Financial Crisis, showing lower volatility and better upside and downside benefits

What was the impact of low interest rates on public pension plan investments?

The ultra-low interest rate environment following the financial crisis led to significant changes in how public plans invest, driving them toward more diverse investment portfolios

How successful have public pension plans been in meeting their return expectations?

Public plans have largely met or exceeded their actuarial assumed rate of return over rolling 5 and 10-year periods, particularly after implementing greater portfolio diversification

What investment strategy did U.S. public pension plans use in the 1920s and 1930s?

In their early years during the 1920s and 1930s, U.S. public pension plans followed fiscal mutualism, primarily investing in municipal bonds