Lower equity forecasts could pressure pension plans to hit return targets

Declining equity return forecasts are creating significant pressure on public pension plans to meet their long-term return targets, according to reporting from Pensions & Investments. Callan, a major pension consulting firm, projects substantially lower returns for U.S. equities from 2026 through the end of 2034 relative to performance during the previous decade, establishing a challenging investment environment for plan sponsors already operating with elevated return assumptions.

The structural challenge facing pension funds is acute. Public pension plans maintain a median assumed rate of return of 7%, yet market analysis indicates these plans have only a 50% probability of achieving this target under current conditions. This mismatch between assumptions and realistic return expectations creates compounding pressure on plan finances, as underfunded plans depend heavily on investment returns to bridge the gap between contributions and benefit obligations.

Pension plans face three primary levers to address this gap: reducing assumed return rates downward to reflect more realistic expectations, increasing required contributions from sponsoring governments and employers, or escalating portfolio risk through alternative asset allocation. However, most public pension funds are unlikely to reduce their assumed return rates in the near term, according to available market intelligence, preferring instead to maintain current expectations despite ongoing market uncertainties. This reluctance reflects both political realities—lower assumptions trigger immediate contribution increases—and institutional inertia.

Over the past three decades, public pension funds have substantially increased their risk exposure, expanding allocations beyond traditional equities and fixed income into private equity, hedge funds, private credit, and real assets. However, the capacity to further increase portfolio risk faces practical limits, particularly for already-leveraged strategies. The convergence of lower equity return forecasts, sticky return assumptions, and constrained risk escalation capacity creates a difficult trilemma for plan trustees tasked with meeting return targets while managing stakeholder expectations and contribution volatility.