Key Takeaways
- • Significant asset reallocation underway: Public pension funds increased private equity allocations to 17% in 2023 from 14.5% in 2022, and real estate to 10.7% from 8.1%—representing the most notable shift in asset allocation in a decade-long stable period.
- • Equities and fixed income declining: U.S. equity allocations fell to 24.7% from 27.3%, non-U.S. equities dropped to 16.4% from 18.8%, and U.S. fixed income declined to 19.7% from 20.0% year-over-year, based on Milliman's analysis of the largest 100 U.S. public pension plans.
- • Portfolio composition in 2023: The top 100 public pension funds now allocate 41% to equities, 21% to fixed income, and 34% to private equity and real estate combined—a marked departure from the 46%, 22%, and 28% split in 2022.
- • Structural demographic pressure: Milliman identified a 10% increase in retiree population within the study cohort, which likely drives the shift toward alternative assets viewed as capable of generating above-market returns to meet pension obligations.
- • Small gains in defensive allocations: Cash holdings rose modestly to 3.8% from 3.6%, while timber and commodities each increased to 1.1% and 1.1% respectively, suggesting selective diversification into inflation-sensitive assets.
Summary
Public pension funds are executing a material strategic reallocation away from traditional equities and fixed-income securities toward private equity and real estate, according to Milliman's 2023 Public Pension Funding Study, which analyzes asset allocation trends across the 100 largest U.S. public pension plans. The shift represents a significant departure from over a decade of relatively stable asset allocation patterns and reflects structural pressures on pension plan finances.
The data, based on the most recently published fiscal year reports as of June 30, 2023, reveals a pronounced redirection of capital. Public pension funds have reduced overall equity exposure from 46% in 2022 to 41% in 2023. Within the equity allocation, U.S. equities declined to 24.7% from 27.3%, while non-U.S. equities contracted to 16.4% from 18.8%. Fixed income allocations remained relatively stable but declined slightly to 19.7% from 20.0%. In parallel, alternative assets have become increasingly prominent: private equity rose to 17% from 14.5%, and real estate increased substantially to 10.7% from 8.1%. Together, private equity and real estate now comprise 34% of pension fund portfolios, up from 28% in the prior year.
Becky Sielman, co-author of Milliman's Public Pension Funding Study, noted in a press release that "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." The study also identified a 10% increase in the retiree population within the analyzed cohort, underscoring the demographic headwinds facing public pension systems. Rising retiree counts place pressure on pension plan assets to generate robust returns to meet benefit obligations, likely incentivizing the pursuit of higher-yielding private market strategies.
Smaller allocations saw modest adjustments as well. Cash allocations increased from 3.6% to 3.8%, while timber and commodities each rose to 1.1% from 0.9% and 0.8% respectively. These incremental increases in defensive and commodity-linked positions suggest pension funds are selectively hedging against inflation and market volatility while pursuing their broader alternative asset strategy. The structural shift toward private equity and real estate reflects a multi-year trend among large institutional investors seeking returns that exceed traditional public equity and bond markets, though such strategies typically involve longer lockup periods, higher fees, and reduced liquidity compared to public securities.
The data, based on the most recently published fiscal year reports as of June 30, 2023, reveals a pronounced redirection of capital. Public pension funds have reduced overall equity exposure from 46% in 2022 to 41% in 2023. Within the equity allocation, U.S. equities declined to 24.7% from 27.3%, while non-U.S. equities contracted to 16.4% from 18.8%. Fixed income allocations remained relatively stable but declined slightly to 19.7% from 20.0%. In parallel, alternative assets have become increasingly prominent: private equity rose to 17% from 14.5%, and real estate increased substantially to 10.7% from 8.1%. Together, private equity and real estate now comprise 34% of pension fund portfolios, up from 28% in the prior year.
Becky Sielman, co-author of Milliman's Public Pension Funding Study, noted in a press release that "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." The study also identified a 10% increase in the retiree population within the analyzed cohort, underscoring the demographic headwinds facing public pension systems. Rising retiree counts place pressure on pension plan assets to generate robust returns to meet benefit obligations, likely incentivizing the pursuit of higher-yielding private market strategies.
Smaller allocations saw modest adjustments as well. Cash allocations increased from 3.6% to 3.8%, while timber and commodities each rose to 1.1% from 0.9% and 0.8% respectively. These incremental increases in defensive and commodity-linked positions suggest pension funds are selectively hedging against inflation and market volatility while pursuing their broader alternative asset strategy. The structural shift toward private equity and real estate reflects a multi-year trend among large institutional investors seeking returns that exceed traditional public equity and bond markets, though such strategies typically involve longer lockup periods, higher fees, and reduced liquidity compared to public securities.
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