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

17 Pages Posted: 31 May 2022

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Calvin Yu

BlackRock, Inc

Sarah Siwinski

BlackRock, Inc

He Ren

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: May 15, 2022

Abstract

During the 2010s, the assets of public pension plans generated significantly higher returns than their assumed, or actuarial, rates of return. In a sample of sixty-nine U.S. public plans with a total of $2.1 trillion of assets, the return outperformance of assets over the assumed returns was more than 200 basis points for the ten years ending June 30, 2019. The outperformance was driven by the asset allocations being mostly exposed to economic growth, which constituted nearly 75 percent of the total portfolio variance. Based on capital market assumptions with lower returns to growth-sensitive assets over the next decade, pension plans are less likely to outperform their assumed returns and also may experience significant downturns in scenarios where growth slows. In addition, the forecasted returns for fixed income over the next ten years are expected to be significantly lower than the historical experience over the past few decades due to much lower starting yields. Optimal pension allocations that are more likely to meet current return targets generally involve increasing allocations to alternatives and using leverage explicitly or through portable alpha strategies.

Keywords: Public Pension Portfolios, Alternative Investments, Leverage, Portable Alpha Strategies

JEL Classification: G11

Suggested Citation

Ang, Andrew and Yu, Calvin and Siwinski, Sarah and Ren, He, Public Pension Portfolios in a World of Low Rates and Low Risk Premiums (May 15, 2022). Journal of Investment Consulting, Vol. 21, No. 1, pp. 30-44, 2022, Available at SSRN: https://ssrn.com/abstract=4114917

Andrew Ang

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

Sarah Siwinski

BlackRock, Inc ( email )

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

He Ren

BlackRock, Inc ( email )

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

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