Today, US pensions are navigating delivering sustainable retirement incomes in a radically transformed macroeconomic landscape clouded in uncertainty and percolating systemic risks. To meet return demands, many funds are doubling down on private market allocations. However, this shift comes with enhanced data management, reporting, and regulatory challenges, requiring pensions to uplevel their technology infrastructure. Here’s how these trends are set to reshape pension strategies in the year ahead.
Post-GFC, pensions have faced an uphill battle to recoup massive funding shortfalls caused by investment losses and reduced contributions due to strained state budgets. Efforts to adopt conservative actuarial assumptions and adjust discount rates to account for longer lifespans and aging populations have compounded funding struggles.
Despite notable strides in recent years, unfunded liabilities have stubbornly hovered above $1 trillion since the Great Recession. Most pension plans remain stuck in a 70–80% funded range — a level that, if prolonged, could exponentially grow amortization payments on unfunded liabilities and significantly increase benefit costs.
With retirees growing faster than active members — fueled by longer lifespans, a wave of Baby Boomer retirements, and sluggish public-sector hiring post-Great Recession — many plans also face negative cash flows as benefit payments outpace contributions. Further, while pensions have steadily lowered their assumed rates of return over the past decade, hitting their adjusted goals remains a coin flip. Today, pension funds have a 50% chance to achieve a 7% return — the median assumption for state and local plans.
As a result, pensions are pouring capital into private markets to bridge funding and performance shortfalls. In recent years, those in the 70-80% funding range (and above) have been especially aggressive about upping their private equity allocations to boost returns. However, even among states with significantly underfunded ratios, very few have moved to reduce their PE exposures.
The shift reflects the general outperformance pensions have experienced in their private equity portfolios. According to the American Investment Councils’ 2024 Public Pension Report, in 2023, private equity provided the best returns of any asset class on a 10-year annualized basis.
Further, capitalizing on the robust structural growth of private markets proves increasingly essential to access value creation and diversification. As companies stay private for longer, the number of public companies has halved over the past two decades, public equity markets are increasingly concentrated, and over half of global revenues now flow through alternative asset classes.
“We think about private assets as serving three main purposes in the portfolio: enhancing returns, broadening the investable universe, and providing diversification. Over the last 10 years, we have observed significant outperformance in our private market allocations relative to their public market counterparts. For example, private equity outperformed public equity by 500 bps, and private credit outperformed high-yield by 400 bps. Additionally, we seek to capitalize on the trend of more companies staying private for longer and more loans being sourced privately.”Craig Husting, Chief Investment Officer of the Public School and Education Employee Retirement Systems (PSRS/PEERS) of Missouri, in a recent Goldman Sachs interview
“We think about private assets as serving three main purposes in the portfolio: enhancing returns, broadening the investable universe, and providing diversification. Over the last 10 years, we have observed significant outperformance in our private market allocations relative to their public market counterparts. For example, private equity outperformed public equity by 500 bps, and private credit outperformed high-yield by 400 bps. Additionally, we seek to capitalize on the trend of more companies staying private for longer and more loans being sourced privately.”
However, leaning into private markets to close funding gaps comes with a notable trade-off: illiquidity and short-term return volatility. This creates tension for pensions, whose core mission and operations rely on cash to ensure steady payments to beneficiaries, meet payroll, post deriverative collateral, and more.
For example, Washington State Investment Board’s (WSIB) private equity portfolio is benchmarked against the MSCI All-Country World Index (plus a 300 basis point premium). While its PE portfolio outperforms on 10 and 20-year time horizons, short-term returns — five years and under — lag behind the benchmark.
Further, recent years have also highlighted just how intricate the challenges of navigating the illiquidity premium in private markets can become. As higher rates pressured private market valuations and exit markets, distributions of NAV across private equity and venture portfolios fell to their lowest levels in decades.
Delayed distributions have strained cash-strapped pensions’ ability to fund new commitments and manage uncalled capital. This disrupts vintage diversification — a key strategy for consistent private market returns — especially since funds launched after a slowdown often deliver top-tier performance.
For WSIB, asset class selection plays an even more important role in balancing illiquidity as venture capital distributions demonstrate a notable distribution lag to buyout funds.
Looking strictly within the venture asset class, recent circumstances show that the J-Curve is taking even longer to develop with distributions occurring a year or more after when they historically could be expected.
Well-capitalized pensions can perhaps endure extended timelines for PE and VC DPI and avoid more reactive asset allocation changes. However, for pensions with weaker funding ratios, tying up capital for a decade or more creates problems if anticipated cash flows deviate from forecasted realizations.
As a large cohort of pensions look to up their private market allocations, managing liquidity will become a larger priority. For more cash-sensitive funds, secondaries may emerge as a favored strategy to access those PE and VC-level returns on shorter time horizons.
Further, pensions are building portfolios amid sweeping paradigm shifts. The tailwinds of globalization, inflation, and interest rates have turned to headwinds, and much uncertainty remains on the forward-looking horizon for these factors in light of President-elect Donald Trump’s pending inflationary tariff and immigration policies.
Amid these trends, private infrastructure’s appeal has surged, driven by predictable cash flows, long-term, inflation-protected contracts, and tangible asset appreciation. Elevated base rates compared to ZIRP have also made private credit’s risk-adjusted returns more attractive, drawing pensions to increase their stakes in the asset class.
Geopolitical instability is also impacting investment strategies. For example, state plans are increasingly scaling back or severing investments in China, with some mandating divestments. Kansas recently completed a $300 million pullout from Chinese securities, while Texas Governor Greg Abbott ordered a halt to new China-based investments and the liquidation of existing holdings last month.
As pension CIOs navigate these challenges, opportunism and the need to make “the best decision for the portfolio right now” have been emphasized by many as critical for investing in today’s uncertain financial landscape.
At this year’s Milken Institute Global Conference, CalSTRS CIO Scott Chan highlighted the growing challenge of inoculating portfolios around systemic risks and uncertainty. The current landscape, he said, demands a more flexible, dynamic approach to portfolio construction, noting that “every incremental dollar must now compete across the entire portfolio at CalSTRS.”
The remarks underscore a key principle of the total portfolio approach (TPA), an investment ideology gaining traction among top global pensions. Departing from traditional strategic asset allocation (SSA), TPA abandons asset buckets and benchmarks, instead fostering unified investment decision-making and intensifying competition for capital across the portfolio. Every marginal dollar of investment must “earn its place.”
Last month, CalPERS CIO Stephen Gilmore unveiled plans to replace SSA with TPA. The shift, he said, looks to better harness the pension’s risk capacity and unlock the potential for higher long-term returns. He argued that SSA limits flexibility, preventing capital from flowing to the most attractive investments and lends to benchmark-hugging returns.
“We have quite a bit of latitude to take downside risk or increase risk. The reality is we don’t take that latitude. We tend to stick very closely to the benchmark. Conceptually, we can move the risk quite a bit.”Stephen Gilmore, Chief Investment Officer, CalPERS in a November board meeting.
“We have quite a bit of latitude to take downside risk or increase risk. The reality is we don’t take that latitude. We tend to stick very closely to the benchmark. Conceptually, we can move the risk quite a bit.”
Leading pensions in Canada, Australia, and New Zealand have embraced TPA, leveraging its flexibility to seize opportunities like the 2022 public equities downturn and a post-Covid pivot to private credit — without waiting on board-approved SSA changes. Will CalPERS lead the charge for its adoption in the US? Time will tell, but the model’s general orientation toward private markets is of particular interest.
Systemic risks posed by climate change remain top of mind for allocators — only 18% of LPs disregard climate as a material investment risk, per PEI’s 2025 LP Perspectives Survey. Potential impacts on GDP, inflation, and corporate asset prices have driven a large cohort of pensions to set net-zero targets and incorporate climate risk into investment decision-making. With long holding periods and the option for active ESG execution, private asset classes have become central to these efforts — 60% of pensions direct sustainable investments into venture capital, private equity, or private debt.
“With our private assets, we actively support the development of robust sustainability practices within portfolio companies. For companies where we have significant ownership or influence, we help them plan and execute transition towards a low carbon future.”Anna Murray, Senior Managing Director and Global Head of Sustainable Investing at OTPP, in a PEI interview.
“With our private assets, we actively support the development of robust sustainability practices within portfolio companies. For companies where we have significant ownership or influence, we help them plan and execute transition towards a low carbon future.”
However, multiple implementation paths — each fraught with unique challenges — have created hurdles for pensions to achieve these targets. Some are taking a “break-up” approach to decarbonization, shifting portfolios away from high-risk sectors or divesting from “dirty assets.” While these strategies may reduce exposure or decarbonize on paper, they don’t deliver net emission reductions and leave broader climate risks unresolved.
Using climate improvements as a value creation lever at an asset level either via fund investing or more actively as a co-investor offers another route. However, fragmented, inconsistent reporting and data remain a major barrier to stitching together a portfolio-level view of these efforts to assess impact. Only 3% of LPs describe GPs’ ESG reporting as “excellent,” and pressures will likely mount on fund managers to make headway on improvements as renewables exposures swell.
More specifically, accessing high-quality emissions data from managers remains a major hurdle, plagued by inconsistent calculations across asset classes, managers, and data providers. Adding to the complexity is linking emissions data to an LP’s equity stake in an underlying company — a challenge CalSTRS’ has experienced with its climate reporting.
Investing in companies developing technologies to reduce emissions offers another implementation option. However, often executed through venture capital, innovation risk comes into play. Will the technology deliver? Additionally, most climate funds are concentrated among emerging managers — though this is beginning to balance out — which intrinsically means more volatility and sharper manager selection.
The recent wave of anti-ESG legislation in red states exposes the starkly bifurcated interpretations of fiduciary duty in managing climate risk across the US, and uncertainties about how this polarization could ripple up to the federal level have intensified post-election. Trump’s ‘drill baby drill’ agenda and rhetoric toward ESG has left the fate of many Biden-Era economic incentives legislation unknown.
A repeal of the Inflation Reduction Act could dampen the return calculus of climate tech investments, which have benefited from subsidies that made unit economics for renewable projects more competitive. Further, key regulatory efforts, including Gensler’s anti-greenwashing proposals, the SEC’s climate disclosure rules, and the Department of Labor’s ESG-friendly pension rule, will likely get scrapped.
As pensions boost private market allocations, data management challenges are intensifying. The sheer volume of data — especially unstructured information — generated across the investment value chain is outpacing the capabilities of many legacy systems. With portfolios and asset exposures growing in complexity, pension funds face growing pressure to create a unified, real-time view of their entire portfolio at the most granular level to minimize risks, enhance decision-making, and streamline operations.
“The high level of a total portfolio approach is about focusing on the funded goals. It is about having that competition and capital cross the portfolio but having collaborations. It’s about having a common language, and it is about having the analytics and the data and visibility to be able to do that.”Stephen Gilmore, CIO of CalPERS
“The high level of a total portfolio approach is about focusing on the funded goals. It is about having that competition and capital cross the portfolio but having collaborations. It’s about having a common language, and it is about having the analytics and the data and visibility to be able to do that.”
External demands for greater reporting and transparency are also mounting as funds face rising scrutiny over private market valuations. The share of pension fund assets subject to non-transparent accounting methods has grown to 27.9%, up from 9% in 2007. As a result, “valuation risk” has roughly tripled since the GFC. This has intensified pressure from both regulators and stakeholders to demand clearer insights into private asset valuations to avoid artificially inflating funding levels.
AI excitement continues to dominate the technological ecosystem. However, most pensions are still assessing how to tap the technology across their internal workflows. According to PEI’s 2025 LP Perspectives survey, roughly 57% of allocators are still exploring AI’s potential, while just 20% have fully integrated it into their workflows. This largely reflects the state of AI implementation, as many pensions cautiously approach use case deployment.
This said, some are ramping up experimentation. MassPRIM announced plans to train large language models (LLMs) on decades of its pension data to explore use cases in investment analysis and monitoring. Similarly, CalSTRS has started to experiment with AI to process and summarize market research faster to uncover key insights. Ultimately, as pensions continue to dive into their data efforts, consolidating and structuring investment data is the foundational first step to positioning use cases up for success.
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