Public Pension Portfolios in a World of Low Rates and Low Risk Premiums

35 Pages Posted: 30 Jun 2021

See all articles by He Ren

He Ren

BlackRock, Inc

Sarah Siwinski

BlackRock, Inc

Calvin Yu

BlackRock, Inc

Andrew Ang

BlackRock, Inc

Date Written: March 31, 2021

Abstract

Over the 2010s, the assets of public pension plans generated significantly higher returns than their assumed, or actuarial, rates of return. In a sample of 69 US public plans with a total of $2.1 trillion of assets, the return outperformance of assets over the assumed returns was over 200 basis points for the 10 years ending June 30, 2009. The outperformance is driven by their asset allocations being mostly exposed to economic growth, which constitutes nearly 75% of the total portfolio variance. Based on capital markets assumptions with lower returns to growth-sensitive assets, pension plans are less likely to outperform their assumed returns and may also experience significant downturns in scenarios when growth slows. In addition, the forecasted returns for fixed income over the next 10 years are expected to be significantly lower than the historical experience over the last few decades due to much lower starting yields. Optimal pension allocations more likely to meet current return targets generally involve increasing allocations to alternatives and using leverage—explicitly or through portable alpha strategies.

Keywords: Public Pensions, Risk Management, Portfolio Optimization, Alternative Investments

JEL Classification: H55, G32, H61

Suggested Citation

Ren, He and Siwinski, Sarah and Yu, Calvin and Ang, Andrew, Public Pension Portfolios in a World of Low Rates and Low Risk Premiums (March 31, 2021). Available at SSRN: https://ssrn.com/abstract=3869703 or http://dx.doi.org/10.2139/ssrn.3869703

He Ren

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Sarah Siwinski

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Calvin Yu (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Andrew Ang

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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