Positioning for change: Public pensions after the great moderation

In 2022, public pension plans navigated a difficult market and macroeconomic conditions. Poor market returns, including a rare twin selloff in equity and bond markets, have undermined aggregate funded ratios. BlackRock partnered with Coalition Greenwich to conduct a research survey of public plans’ priorities, challenges and portfolio positioning.

Investment priorities

Mitigating inflation, rising rates and a possible recession

Investors apparently predict 2023 will look much like 2022, as rising interest rates and market volatility also remained top of mind for decision-makers. They also forecasted another tough period for investment returns next year.

Concerns over inflation and a potential economic downturn loomed large in our survey as asset allocation influences.1 The top three concerns for these decision-makers are the need to navigate high inflation, market volatility and rising interest rates.

Investment priorities naturally reflected the above popular asset allocation influences.

  • Two thirds of plans reported that positioning their portfolios for higher rates was important and that high quality, short-duration fixed income was the preferred solution; followed by real assets and private debt.
  • Two thirds of respondents also stated that mitigating high inflation was crucial — real estate was the heavily favored response to rising prices, especially among large plans, followed by inflation-indexed bonds and infrastructure.

Investment strategies to position for rising rates

Investment strategies

Alternatives allocations

Real estate, private equity and private credit in demand

Buoyed by solid recent performance, the multiyear upward trend in allocations to private and alternative asset classes by public pension plans no sign of abating. Funds largely remain comfortable with illiquidity and continue to move up the risk curve in search of strong investment returns. In the broad alternatives category, there were identifiable preferences among plans.

Echoing our earlier finding of its popularity in mitigating inflation, almost two-thirds of investors described real estate and private equity to be their  top two alternatives’ priorities over the next 12 months.

Quotation start

When you’re growing the [illiquid] portfolio, you’ve got more money going out the door than coming in. Public markets, which have been our primary source of liquidity, have shrunk, and so liquidity, where it was not an issue before, is now on the radar screen.

Quotation end
Interviewee with mid-sized West Coast plan

Other alternative asset classes in demand included private credit and infrastructure, for which investors are seeking to add to their target weightings. For private credit, direct lending was by far the favored approach.

Changes to target allocations across asset classes

Target allocations

Governance challenges

Often hamstrung by a lack of internal resources, some public plans are choosing to bolster their expertise and reach by drawing upon OCIOs, ensuring they can take timely advantage of investment opportunities and gain access to differentiated alternatives strategies. For those who are facing governance issues, almost half of them said that attracting and keeping talent was currently their biggest test.

As a solution, three in 10 plans intend to add to their asset manager roster in the next 12 months. This was driven in large part by a need for new private market or alternatives managers, reflecting appetite for different strands of private market strategies, such as direct lending and co-investments, that have gained popularity with plans in recent years.

Quotation start

It’s hard to find the resources to stay on top of what’s a very complex portfolio for us. So just managing the inflow of evaluating different opportunities is always a challenge.

Quotation end
CIO, Fire & Police Pension Association of Colorado

Reasons for hiring an OCIO

Hiring an OCIO

Learn more about governance challenges

Finally, respondents were split on ESG adoption, with mixed views on future adoption from plans not already embracing ESG. Just under half of the investors surveyed have adopted ESG practices and strategies, with adoption greatest among large plans. The respondents who are not currently using ESG approaches said that they were undecided about whether they would make this commitment within the next five years, suggesting many may be taking a patient approach in the journey to ESG adoption.

Survey design and methodology

To better understand how investors are approaching the current investment landscape, BlackRock partnered with Coalition Greenwich to conduct a research survey of public plans’ priorities, challenges and portfolio positioning. A total of 88 plans — 78 U.S. and 10 Canadian funds — completed an online survey between August and October 2022. In-depth telephone interviews with chief investment officers (CIOs) and other decision-makers at 10 plans complemented the online survey.


Download the full report to dive deeper into the results

Our survey findings focus on how decision-makers at U.S. and Canada public pension plans are approaching a volatile environment, looking to mitigate key risks while assuming measured investment risk opportunistically in pursuit of long-term return.
Greenwich Survey report