U.S. public pension plans continue to reduce their return assumptions. With the 10-year economic expansion slowing across the globe, this makes sense. But since lower return assumptions mean higher valuations for liabilities, the downward revisions tend to be incremental, raising the question of whether even these new, lower numbers will be achieved. And if it looks like the current asset mix is unlikely to hit the target, are there any adjustments that might bring the plans closer without adding unnecessary risk?
To explore these questions, we recently analyzed a representative group of public pension portfolios. We found that the gap between assumed and expected median returns is narrowing but still significant. At the same time, our work also points to practical steps many plans could take to close the gap in a prudent way — building resilient portfolios that are positioned for potential growth while mitigating downside risk.
For our study, we analyzed the portfolios of 55 state and local funds representing $2 trillion in assets and ranging in size from $3 billion to $224 billion. (See Figure 1 for details.) Working with data gathered by Pensions & Investments, we used BlackRock's Aladdin platform to map the portfolios to our most recent capital market assumptions and estimate their expected risk and return characteristics. We then organized the results according to different plan characteristics, to see what trends we could uncover and identify lessons that plans could learn from their peers.