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As pension funds navigate evolving economic landscapes, they are increasingly directing capital toward real assets—real estate, infrastructure, and private equity—to enhance returns and manage risk. This shift reflects both strategic foresight and a response to market pressures.
Traditionally, public equities have formed the largest portion of pension portfolios, with fixed income and cash trailing. Yet alternative investments—particularly real assets—have steadily grown as the second-largest bucket.
By early 2024, select public retirement systems saw fixed income allocations nearly equaled alternatives in size, underscoring a recalibration of risk and return expectations.
Larger corporate plans have leaned into alternatives to diversify risk during volatility and seek uncorrelated returns.
Over the past decade, allocations to real assets—core infrastructure, direct real estate, and private equity—have climbed as pensions pursue long-term capital appreciation. Shifts in strategic allocations reflect a desire to align portfolios with tangible, income-producing assets.
The share of pension assets in fixed income and cash has plunged from 96% in 1952 to 27% by 2012, marking a profound move toward both public equities and alternatives. Regional variations persist:
Nordic pensions favor local real estate and infrastructure, with alternative allocations ranging from 3% to 32%. In contrast, large US systems like CalPERS and CalSTRS lead global private equity commitments.
In Q1 2025, global funds targeted an average private equity allocation of $306.8 million but held $330.3 million, indicating overallocation by default due to denominator effects.
Meanwhile, “other” real assets averaged 23% of corporate pension portfolios at FY2024 close, reflecting robust interest in tangible holdings.
Pension funds cite multiple catalysts for raising real asset allocations, including:
These drivers combine to make real assets an attractive strategic complement to traditional allocations, especially amid uncertainty.
Pension plans with higher alternative exposures have, at times, outperformed in volatile years, offering a buffer against equity drawdowns. In 2024, plans holding at least 50% equity—including alternatives—earned average returns of 8.3%, versus 1.5% for low-equity plans.
However, real assets carry unique risks:
Funds must weigh these factors when calibrating long-term portfolios, ensuring they maintain sufficient liquid reserves.
Global pension exposures to real assets differ markedly by region and plan size. The following table highlights key allocations and focuses.
Entering 2025, US state and local pension funds held an average funded ratio of 80.2% and carried $1.37 trillion in debt, indicating ongoing solvency pressures.
Market shocks can erode real asset values quickly. For example, the FTSE Nareit All Equity REITs Index fell 7.4% since April 2025, spotlighting potential short-term volatility.
Policy changes—like tariffs that raise construction costs—pose further threats to property valuations. Funds must prepare for scenarios where rapid rebalancing or liquidity injections become necessary.
As pension funds pivot to real assets, they embrace both opportunity and complexity. By blending long-term yield potential with effective risk management, managers aim to secure retiree benefits in a dynamic economic landscape.
Decision-makers must continually reassess exposures, balancing illiquid commitments with cash needs, and remain vigilant against market and policy headwinds. In doing so, they can harness the strengths of real assets to build resilient, high-performing portfolios suited for the challenges ahead.
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