Long-term public pension returns don't top 60/40 index — Center for Retirement Research

Long-term investment returns for public pension plans show virtually no difference between their often-complex strategies and a simple 60% equity/40% bond index, according to research by the Center for Retirement Research at Boston College.

“If public plans cannot reasonably anticipate higher long-term returns from a complex active approach, a strong argument could be made that they should stick with a simple and transparent strategy,” said the report published June 18 that compared annualized public pension returns over several periods between June 2000 and June 2023.

Taken as whole, public pension plans’ annualized net returns were 0.03% less than the 60/40 index returns from June 2000 through June 2023. (Both annualized net returns were about 6.1% during this period).

The returns varied during certain times based on comparing the net asset-weighted annualized returns of 145 public pension plans in the CRR database. CRR researchers compared pension fund returns to a hypothetical portfolio of 60% U.S. stocks (Russell 3000 Total Return index) and 40% U.S. bonds (Bloomberg U.S. Aggregate Bond index), with a 10-basis-point management fee.

The public pension plan returns outperformed that 60/40 strategy for the June 2000-June 2007 period. However, they trailed the index for the June 2007-June 2014 and June 2014-June 2023 periods, the report said.

“In recent years, pension plans have been shifting their targets from traditional equities and bonds to alternative assets, such as private equities, hedge funds, real estate, and commodities,” the report said.

“While their financial reports often cite diversification and risk reduction as the reasons for this shift, prior studies suggest that reaching for higher returns is the main motivation,” the report said. “At the same time, sharp declines in the value of traditional stocks and bonds — as in 2008, 2009, and 2022 — have also contributed to the growing share of pension fund assets held in alternatives.”

More investing in alternatives usually means higher expenses for hiring outside investment managers, but many pension funds also hire outsiders to handle more traditional investments, the report said.

“The question is whether all this shuffling of investments and greater reliance on complex assets — which comes with higher fees and more staff — is better than sticking with index funds of traditional stocks and bonds,” the report said.

The report was written by Jean-Pierre Aubry, associate director of state and local research at the CRR, and Yimeng Yin, a CRR research economist.