A 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, NIRS research director; Katie Comstock, Partner and Head of Public Sector Solutions at Aon; and John Sullivan, Associate Associate Partner, Asset-Liability Management at Aon.

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. 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.