Figure 13 tracks how public pension plans have dramatically restructured their investment portfolios from 2001 to 2024, moving away from traditional stocks and bonds toward alternative investments.

In the early 2000s, public equities and fixed income made up roughly 85-90% of the typical pension portfolio. By 2024, traditional investments had shrunk to approximately 66% of assets. The difference went into alternatives like private equity, real estate, hedge funds, and private credit. Alternative investments used to represent 9% of public pension’s portfolios back in 2001, but it now makes up 34% of total assets.

This represents a fundamental change in how pension systems approach investing. What started as small allocations to alternative investments has evolved into core portfolio components. Private equity and real estate, which were niche holdings two decades ago, now represent substantial portions of pension fund assets.

Pension boards justify this shift by arguing that alternatives can deliver higher returns and provide diversification beyond traditional markets. The theory is that private equity and real estate offer access to returns that public markets can’t provide, while also reducing correlation with stock market volatility.

But this chase for higher yields comes with significant tradeoffs. Alternative investments typically charge much higher fees, provide less liquidity, and offer less transparency than traditional stocks and bonds. They also tend to be more complex and harder to value accurately, making it difficult to assess whether they’re actually delivering the superior returns that justify their higher costs and risks.

The timing of this shift is also concerning. Much of the move into alternatives occurred after pension systems accumulated large unfunded liabilities, suggesting that investment strategy changes were driven more by funding pressure than by careful risk-return analysis.

Figure 14 models what pension investment returns might look like over the next 10 and 20 years based on current asset allocations and market expectations. Using capital market assumptions from a 2025 Horizon survey, we ran 10,000 simulations to see the range of potential outcomes for average annual returns.

The blue distribution shows 10-year projections, while the blue shows 20-year results. Both reveal substantial probability that pension systems will fall short of their return targets, confirming that investment risk remains a major threat to pension funding.

The shape of these distributions tells an important story about time and risk. The 20-year distribution is taller and narrower than the 10-year version, showing that returns tend to converge closer to long-term averages over extended periods. This supports the pension industry's argument that they're long-term investors who can ride out short-term volatility.

But even over 20 years, there's meaningful probability of underperformance. Given that most pension systems still assume returns of 7% or higher, these projections suggest many will continue accumulating unfunded liabilities as actual performance falls short of optimistic assumptions.

The modeling also assumes that current asset allocation strategies will deliver their expected risk and return characteristics. If alternative investments fail to perform as projected, or if correlations between asset classes increase during market stress, actual outcomes could be worse than these simulations suggest.

Figure 15 shows the probabilities that pension systems will fail to hit their investment targets over the next 10 and 20 years, based on the 10,000 simulations from the previous analysis.

For the national average assumed return rate of approximately 6.87%, there’s about a 49% chance of falling short over the next decade and a 44% chance over 20 years. When plans assume 6.87% returns and build their entire funding strategy around that target, they’re accepting nearly even odds that they’ll accumulate additional unfunded liabilities instead.

More importantly, the real concern is tail risk. The chart shows that public pension systems face a 21% chance — one in five — of earning less than 4% on average over the next decade. Over a 20-year horizon, the probability of such underperformance is still 10%. In other words, there is a meaningful risk of substantial shortfalls relative to plans’ assumed returns. This stems from the inherent uncertainty of equity and alternative investments, which dominate pension portfolios. The risky nature of these assets cuts both ways: they raise expected returns but also increase the odds of catastrophic losses.

The probabilities highlight why contribution policies need to be resilient to investment disappointment. Pension systems that assume they’ll hit their targets half the time should have funding strategies that can handle the other half when they don’t. Too many systems operate as if meeting their investment assumptions is guaranteed rather than acknowledging the substantial probability of shortfall.

Return Probability Data

This table presents data for all pension systems back to 2001 where available, displaying the probability of pension plans missing a range of investment return assumptions. Users can filter by plan, and the chart includes options to download the data for further analysis.