Public Pension Funds Shifting Public Assets to Private Equity, Real Estate, According to Milliman | Chief Investment Officer (2024)

Public Pension Funds Shifting Public Assets to Private Equity, Real Estate, According to Milliman | Chief Investment Officer (1)

Public pension funds are shifting a portion of their equity and fixed-income assets to private equity and real estate, according to Milliman’s public pension funding study, which tracks the funded status and other data about of the largest 100 U.S. public pension plans.

Data in the report was based on the most recently published fiscal year reports available, from June 30, 2022.

According to the study, public pension funds have noticeably reduced allocations to fixed income and equities and shifted these allocations to private equity and real estate. Public pension funds overall allocated 41% of their portfolios to equities, 21% to fixed income and 34% to private equity and real estate, according to the study. In the 2022 report (covering data through June 2021), these figures were 46%, 22% and 28%, respectively. Prior to 2023, these asset allocations had stayed relatively consistent, according to Milliman data.

Allocations to U.S. equities declined to 24.7% in 2023 from 27.3% in 2022, and non-U.S. equities declined to 16.4% from 18.8% during the same period. Allocations to U.S. fixed income declined slightly to 19.7% from 20.0% over the year.

Allocations to cash increased from 2022 to 2023, with allocations rising to 3.8% from 3.6%. Timber and commodities both increased to 1.1%from 0.9% and 0.8%, respectively. Allocations to private equity rose to 17% in 2023 from 14.5% in 2022, and real estate allocations rose to 10.7% from 8.1% in the same period.

“From 2013 through 2022, the PPFS asset allocation was largely stable, but our 2023 study saw a noticeable move from equity and fixed income into private equity and real estate,” said Becky Sielman, co-author of Milliman’s PPFS, in a press release. “In addition, the 2023 study found a 10% increase in retiree population.”

Milliman also reported that plan assets in the study were estimated to stand at $4.7 trillion, as of November 30. Milliman estimated that tracked plans return an annualized 7.8% between their measurement dates and June 30, 2023.

Milliman estimated the aggregate return on assets through November 30 to be 8.0%.

Pension liabilities for the year through November were $6.2 trillion, Milliman estimated, greater than estimated plan assets of $4.7 trillion, producing a deficit of $1.5 trillion.

According to the report, aggregated plan reported funded status declined to 76.1% in the 2023 study from 83.8% in the 2022 study, with funded ratios as low as 75.9% through November 30.

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Tags: Asset Allocation, Becky Sielman, Milliman, Pensions, Public Pension Funding Study

Public Pension Funds Shifting Public Assets to Private Equity, Real Estate, According to Milliman | Chief Investment Officer (2024)

FAQs

Why do pension funds invest in real estate? ›

Long-term investments are in commercial real estate, such as office buildings, industrial parks, apartments, or retail complexes. The goal is to create a portfolio of properties that combine equity appreciation with a rising stream of inflation-adjusted income to balance the ups and downs of the markets.

Are pension funds private equity? ›

There are three ways in which pension funds might typically invest in private equity – through a limited partnership, through a fund-of-funds or through an investment trust. The three options are explored in more detail below. A limited partnership is the most common way that pension funds invest in private equity.

Who owns pension fund assets? ›

In the augmented balance sheet model of pension finance, the stockholders own the assets in the pension plan. In the group model, the employees and the stockholders share ownership of these assets.

Why might workers be ineligible for retirement funds from a private pension plan although they have worked all their lives? ›

Workers might become ineligible for retirement funds from private pension plan even though they have worked all their lives, as companies make the sole discretion in paying the retirement amount which is associated with many factors such as financial situation of the company, stock value, market position etc.

What is the largest pension fund in real estate? ›

The 25 Largest Public Pension Funds that Allocate to Private Real...
  • New York State Common Retirement Fund. ...
  • Florida State Board of Administration. ...
  • Washington Department of Retirement Systems. ...
  • Washington State Investment Board. ...
  • Teacher Retirement System of Texas. ...
  • State of Wisconsin Investment Board.
Dec 14, 2023

Can you use retirement funds to buy real estate? ›

You can use the money you've invested in a retirement account, such as a 401(k) or IRA, to help purchase a home. And in certain situations, it's even possible to withdraw funds from a retirement account without paying the 10% early distribution penalty.

Why do pension funds invest in private equity? ›

The traditional drivers of pension investment in private equity include statistical diversification stemming from partial decorrelation to listed securities ('listed equity' i.e. stocks and also bonds), expectation of superior risk-adjusted returns over long periods (typically 8 to 10 years), access to early-stage ...

What is the difference between a public pension fund and a private pension fund? ›

A public pension fund is one that is regulated under public sector law while a private pension fund is regulated under private sector law. In certain countries, the distinction between public or government pension funds and private pension funds may be difficult to assess.

What is the difference between a private pension fund and a public pension fund? ›

State and local DB pension plans are usually funded by employer contributions and contributions from employees themselves, who make regular payments to the fund directly out of their paychecks. 15 In this respect, public plans differ from private sector pensions, which are generally funded by employers.

What is the largest pension fund in the United States? ›

In a bold step tailored to meet the existential challenges and colossal financial risks of a warming climate and harness the massive opportunities of the shift to a new clean economy, California Public Employees' Retirement System, the largest public pension fund in the U.S. managing $446 billion, announced plans to ...

What assets do pension funds invest in? ›

They work by combining the pension contributions of different savers into one giant pot, which is then invested into a range of financial assets, including equities (company shares), bonds and gilts, property, and even cash.

What are the assets allocated in pension funds? ›

Assets in pension plans and in public pension reserve funds are invested primarily in bonds and equities. The proportions of equities and bonds in the portfolios vary considerably across countries but there is, generally, a greater preference for bonds.

What is the 1000 hour rule? ›

The 1000-Hour Rule is a provision that allows temporary employees to qualify for certain benefits, such as participation in an employer's retirement plan, after working 1000 hours within a 12-month period.

What is the rule of 55 lump sum? ›

Under the rule of 55, the IRS permits you to withdraw money from your current 401(k) or 403(b) plan before age 59½ without paying a 10% penalty on the amount withdrawn if both of the following are true: (1) Withdrawals occur in the year you turn 55 or later, and (2) you have left your employer.

What is the Erisa 1000 hour rule? ›

Employees in the plan who work part-time, but who work 1,000 hours or more each year, must be credited with a portion of the benefit in proportion to what they would have earned if they were employed full time.

Where do pension funds invest their money? ›

How Pension Funds Invest Their Money. The traditional investing strategy for a pension fund is to split its assets among bonds, stocks, and real estate. An emerging trend is to put some money into alternative investments, in search of higher returns and greater diversity.

Why do pension funds invest in hedge funds? ›

2 Hedge funds provide flexibility to move in and out of markets, making them a suitable alternative asset class for many investors. Unlike their mutual fund counterparts, hedge fund managers focus on absolute returns and their ultimate goal is to profit in all types of market environments.

Should you add real estate to your retirement portfolio? ›

Owning rental properties can provide significant tax benefits, including depreciation, interest, and repair costs. Real estate investing can reduce your tax liability, and you can avoid many of the unnecessary fees associated with investing in stocks or contributing to 401(k) plans.

Why do pension funds invest in bonds? ›

Bonds are often used to help spread the risk in people's pension investments as they get closer to retirement. Long-term bonds specifically are used where people plan to buy a guaranteed income for life (annuity) with their pension pot when they retire.

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