Public Pensions See Growth, Diversification in the Private Markets

Panelists at the Council of Institutional Investors' 2024 Fall Conference discuss how their allocations to alternatives have evolved since the global financial crisis. 



As there has become more of an incentive for public pension funds to invest in private markets, asset allocations for these pension funds have shifted dramatically over the years, according to a panel of experts who spoke at the Council of Institutional Investors’ 2024 Fall Conference in Brooklyn, New York, on Tuesday.

Tyler Bond, research director at the National Institute on Retirement Security, explained that in 2007, before the global financial crisis of 2008 and 2009, public equities made up about 60% of asset allocations for public pension plans. By 2021, public equities had dropped to less than half of asset allocations.

Allocations to fixed income also dropped significantly in these years, and Bond noted significant growth in allocations to private equity, private credit, real estate and other alternative assets.

Across state and local pension plans in the U.S., over the past 30 years, NIRS found that 61.4% of pension revenue came from investment earnings.

Want the latest institutional investment industry
news and insights? Sign up for CIO newsletters.

“It matters how public pension plans are investing because they rely on their investment returns to generate such a substantial portion of revenue,” Bond said. “If [the plan] is not getting the revenue [it] needs from investment earnings, either the members or the taxpayers—or both—have future revenue to make up for.”

Different Challenges, Similar Strategies

Andrew Roth, CEO and executive director of the Colorado Public Employees’ Retirement Association, said the $61.5 billion pension fund that he oversees has allocated more to private equity over time. However, he said Colorado PERA, as well as the Teacher Retirement System of Texas and the California State Teachers’ Retirement System—where he served as the deputy executive director and chief benefits officer respectively—have dealt with funding level challenges, as none of them are currently at 100% funded status.

“In terms of how we can invest to continue to [pay benefits to] as well as grow the fund and pay down the unfunded liability—that’s forced us to consider higher returns,” Roth said. “With bonds and fixed income generating lower returns over the past 20 years, all three of the [pension] funds … have invested in private equity.”

Leola Ross, deputy CIO and head of ESG at Seattle City Employees Retirement System, said SCERS has invested more diversely in private markets over the years—moving from a focus on U.S. markets to more of a global portfolio. She said the pension fund expanded from investing in U.S. core real estate to non-core real estate in Asia and Europe, as well as in infrastructure. More recently, Ross said SCERS has allocated funds to private credit and venture capital.

Besides investing in alternatives, with interest rates rising, Ross said SCERS has been able to lower its portfolio volatility and funding level volatility by going more into long-term bonds.

Funded Status

While public pension assets have more than doubled since 2010, and employers have been contributing more to plans, Bond said overall funded status has remained relatively flat in recent years, with an average funding level of about 75%.

Bond said a primary factor in stagnant funded status is plans making changes to their actuarial assumptions, with the average discount rate moving down to 7% from 8% and more plans adopting generational mortality.

“Plans have invested a lot in buying more conservative assumptions, and going forward, that should be to the benefit of the plan and various stakeholders,” Bond said. “But that comes at a cost, and the cost is that budget ratios have been pretty flat over this time period.”

Ross said SCERS’ funded status has increased in recent years and is currently around 75% or 80%, depending on what actuarial measure is used.

“The notion of fundedness doesn’t get talked about enough,” Ross said. “We actually now measure fundedness volatility as part of our asset allocation strategy.”

In order to lower fund volatility and improve funded status, Ross said SCERS increased its allocations to both private credit and infrastructure, while adding long bonds to the portfolio and diversifying away from some of the core bond allocations. She noted that SCERS has been in the top quartile for pension funds in terms of returns.

Roth added that Colorado PERA currently has a funded status of about 69.6%. He said the tightening of actuarial assumptions has been a “real hit” to the plan’s funded status, and the plan is currently working on “playing catch-up.”

He explained that the pension plan uses an auto-adjust provision, a complex mechanism that automatically causes employer contributions to increase and retiree cost-of-living-adjustments to decrease when investment returns fall below a certain point. While stakeholders rarely define shrinking COLAs and increased employer contributions as a “measure of success,” Roth said this provision is helping the plan reach fully funded status.

“We’re really engaged in education,” Roth said. “Educating members and stakeholders about complicated actuarial concepts is difficult but worthwhile. Whether it’s 10 years from now or 20 years from now, when we’ve gotten to a much better place, COLAs for retirees can go up, [and] contributions from employers can go down.”

Related Stories:

Can Private Asset Allocations Lead to Privation?

Insurance CIOs See Alternatives Driving Portfolio Returns

Asset Owners Continue Pouring Money into Alternatives in 2023, Up 19%

Tags: , , , , , , , , ,

IBM Secures $6B Pension Risk Transfer With Prudential

The latest deal follows the company closing its defined contribution plan in 2023 in favor of a cash-balance pension plan and an earlier $16 billion PRT.

IBM on Wednesday disclosed that on September 5, it entered into an agreement with Prudential Insurance Co. of America to transfer about $6 billion in defined benefit pension obligations to an annuity provided by the insurer.



The annuity purchase covers about 32,000 participants and beneficiaries of the IBM Personal Pension Plan whose benefits began to be paid prior to 2016, according to IBM’s Form 8-K filed with the Securities and Exchange Commission.

The filing states, “Under the group annuity contract, Prudential has made an irrevocable commitment, and will be solely responsible, to pay the pension benefits of each Transferred Participant that are due on and after January 1, 2025. The transaction will result in no changes to the amount of benefits payable to the Transferred Participants.”

The deal pushes even higher 2024 pension-risk transfer activity, which totaled $26 billion in the first half of 2024, according to new data released by Legal & General Retirement America, an increase of about 15% from the first half of 2023.

For more stories like this, sign up for the CIO Alert newsletter.

IBM’s purchase of the group annuity contract was funded directly by plan assets and required no cash contribution from the company to complete. As a result of the transaction, IBM reported that it expects to recognize a one-time, non-cash, pre-tax pension settlement charge of approximately $2.7 billion in the third quarter of 2024.

The deal comes two years after IBM completed a $16 billion pension risk transfer with Prudential and MetLife covering approximately 100,000 participants and beneficiaries. At the time of that deal, which continues to be one of the largest ever completed, IBM said the amount represented more than 40% of the plan’s obligations.

“The overall funded status of the plan makes the transfer of a portion of the pension liabilities and assets to an insurance company a logical next step to further de-risk retirement-related plans,” the company announced in a 2022 statement.

As of December 31, 2023, IBM’s U.S. pension plan assets totaled $24.44 billion, while projected benefit obligations totaled $19.85 billion, for a funding ratio of 123.1%, according to information from the company’s 2023 annual report.

IBM also stated in the 2023 annual report that “contributions related to all retirement-related plans [U.S. and non-U.S.] are expected to be approximately $1.5 billion in 2024, a decrease of approximately $300 million compared to 2023. … In 2024, we are not legally required to make any contributions to the U.S. defined benefit pension plans.”

It is not clear if or how this deal changes that.

The 2024 pension risk transfer comes less than a year after IBM announced that it would end corporate contributions to the company’s defined contribution plan and instead reopen its cash balance DB pension fund.

That deal, and overall high levels of U.S. corporate pension funding levels in 2024, raised questions about whether other plan sponsors would take advantage of excess pension assets and do something similar.

Milliman, in April, said nearly half of the largest U.S. pension funds were more than 100% funded.

Tags: , , , , ,

«