Pension Fund Analysis

𝐒𝐢𝐦𝐩𝐥𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬, 𝐂𝐨𝐦𝐩𝐥𝐞𝐱 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬: The Case for ... Doing Nothing? 🏖️ Most endowments and pension funds in the US follow a model similar to the aforementioned Yale Model: Large investment teams consisting of veteran investors, making active bets on managers, geographies and industries with the goal of outperforming the market over the long-term. Interestingly, that idea is being upstaged by one of their own. Steve Edmundson, CIO of the Nevada Public Employees’ Retirement System (NPERS), 𝐜𝐡𝐨𝐨𝐬𝐞𝐬 𝐭𝐨 (𝐦𝐨𝐬𝐭𝐥𝐲) 𝐝𝐨 𝐧𝐨𝐭𝐡𝐢𝐧𝐠 𝐚𝐭 𝐚𝐥𝐥. NPERS, to the most part, goes against the ideas of the Yale Model and its search for complexity. 𝐈𝐭𝐬 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐨𝐟 𝐫𝐨𝐮𝐠𝐡𝐥𝐲 66 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 𝐝𝐨𝐥𝐥𝐚𝐫𝐬 (𝐚𝐬 𝐨𝐟 𝐌𝐚𝐫𝐜𝐡 2025) 𝐢𝐬 𝐭𝐨 𝐭𝐡𝐞 𝐦𝐨𝐬𝐭 𝐩𝐚𝐫𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐢𝐧 𝐩𝐚𝐬𝐬𝐢𝐯𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬:For US stocks (35%), they are invested in the S&P. For international stocks (14%), they are invested in MSCI World ex-US. For US bonds (28%), they hold US treasuries. The only exceptions are Private Real Estate and Private Equity (12% target allocation), which they have outsourced to external managers. 𝐀𝐧𝐝 𝐭𝐡𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬 𝐬𝐩𝐞𝐚𝐤 𝐟𝐨𝐫 𝐭𝐡𝐞𝐦𝐬𝐞𝐥𝐯𝐞𝐬: Since inception, NPERS has outperformed the market return by 0,3% p.a. Compare that to CalPERS, the largest public pension fund in the US, which employs a large investment team and makes active investments in liquid and illiquid assets - yet notoriously lags its benchmark over a 20-year period and just barely outperformed over 10- and 30-year periods. It’s interesting to see that large institutional investors suffer from the same level of “ego” that I personally see in affluent investors (and admittedly, sometimes myself): We have a top-notch team, we are smarter than other investors - we can generate alpha, we can outperform the market. But can they, really? Often, the numbers tell a different story. But to me, there's an even more important learning. Many of our affluent clients think that they need to invest differently from the average retail investor simply because they have more investable capital (and maybe my many newsletter about PE and other alts don't help). After all, that level of investable capital is needed to access some asset classes in the first place, such as private equity or hedge funds, and the recent push by GPs into fundraising from affluent individuals doesn’t help either. But it’s especially in such a moment where I like to highlight the story of NPERS: It’s a massive pool of capital, run by a tiny investing team, that actively chose not to make active choices - and that is succeeding with that strategy.

Not investing is an investment decision – and a potentially expensive one. The new study released last week by the Asset Management Association of Switzerland (AMAS), “Risikofähigkeit und Anlagerisiken von Schweizer Pensionskassen”, reveals that Swiss pension funds deliver a lower performance than their risk tolerance would allow. For the quartile most impacted, the foregone performance is estimated at 0.95% p.a. or 13.6% over a ten-year period. My hypothesis is that the same pattern holds true for private client, perhaps at an even larger scale. I always start the discussions with potential investors by stressing a golden rule – be honest when defining your risk tolerance, and never go beyond it. But once the limit has been defined, not fully using it is a material active investment decision. Deciding not to invest in full is taking the active view that doing so will deliver better results for insured people over the long run. This may reduce the volatility and drawdown of a portfolio, but it also may reduce its long-term expected return. Not investing must be understood for what it is: an active asset allocation decision which carries risks too, notably potential underperformance. Let’s have these discussions to make sure our pension funds can maximize their return potential, while maintaining appropriate risk levels to ensure the long-term sustainability of the system and the best possible future of pensioners. A sound and sustainable pension system is key. We are in very good shape in Switzerland. But any additional performance helps, especially when it compounds.

Pensions Piled Into Private Equity. Now They Can’t Get Out. https://lnkd.in/dck6Fjmw This article highlights issues I've written about since 2020. Public Pension funds (PPFs) are trapped in illiquid, expensive PE (and alts in general) investments where 1) distributions are less than the legally required capital calls, resulting in negative cashflow, 2) pension funds, as a result are engaging in discounted PE secondary sales and 3) borrowing (I previously highlighted CalSTRS borrowing up to 10% of assets to address PE liquidity issues). Despite the known risks, PPF exposure to PE/Alts has only grown. In the attached image I share data I extracted from a public data source showing the 10 PPFs most exposed to Alternatives (the PE share is highlighted in the bar colors) - all have over 50% exposure. Perhaps most surprising is that the article notes that CalPERS has been bleeding cash on PE for 4 years, during a relatively robust economy. And expects this to continue 4 more years. In my 2020 article published in the JSF, I wrote about the Iron Triangle of PE, Pensions and CLOs – an interdependent eco-system. This WSJ article highlights the very concerns I raised since 2020. With assets totalling nearly $6T PPFs have grave impact on state and local workers across the country. In my 2020 article I highlighted this codependency and liquidity risk: “The co-dependency between PE firms and PPFs is illustrated by comments from CALPERS chief investment officer Ben Meng (Whyte 2019): “We need private equity to be successful… We need more of it and we need it sooner rather than later.”” "During the GFC, PPFs were forced to honor capital commitments, while their ability to sell their investments in PE funds was constrained. This created cash shortfalls for PPFs and some had to “scramble to muster cash to pay retirees” Key Takeaways: "...The payouts have dried up, creating an expensive problem for investment managers overseeing the savings of workers...." "To keep benefit checks coming on time, those managers are unloading investments on the cheap or turning to borrowing—costly measures that eat into returns. California’s worker pension, the nation’s largest, will be paying more money into its private-equity portfolio than it receives from those investments for eight years in a row." "...private-equity managers are keeping workers’ retirement savings locked up for longer. Nearly half of private-equity investors ... said they had money tied up in so-called zombie [PE] funds". "So pension funds are selling [PE[] fund stakes secondhand—often taking a financial hit in the process. Secondary-market buyers last year paid an average of 85% of the value the assets .... Orlich told Calpers’s board Monday that the cash demands of the [PE] portfolio have dwarfed payouts for four years and would continue to do so for about another four years." #privateequity #pensionfunds

Europe’s pension funds are playing it too safe.. and it’s costing us all. While US and Canadian pension giants are generating 8–11% annual returns, most continental European funds (excluding the Nordics) are stuck in the 4–6% range. Why? Because they’re avoiding the one asset class that’s consistently outperformed: private markets. Compare the numbers: 🇺🇸 US: 15.2% from private equity; 14–20% in private markets 🇨🇦 Canada: 10.9% returns (CPP); 45% in private markets 🇪🇺 Europe: 4–6% returns; 60–70% in bonds, <5% in private equity, almost no venture The takeaway is clear: Illiquidity isn’t the enemy - it’s the unlock. Private equity, infrastructure, and venture capital offer long-term value creation and compounding that bonds and public markets alone simply can’t match. Europe’s pension capital is massively underused. Imagine what reallocating just 5–10% into venture and private markets could do:  - Better pensions  - More innovation funding  - Stronger economic resilience It’s time we bring long-term capital back to long-term investing. #PrivateMarkets #VentureCapital #PensionReform #AssetAllocation #Europe #LongTermCapital

At BlackRock, we know investment boards can ask tough questions. That’s why each year, our Client Solutions Group dives deep into the numbers — transforming complex data into insights that matter. In our latest pension peer studies, we analyzed public and corporate plans across the U.S. Here’s what stood out: Corporate Pensions - Funded ratios hit 104.9%—up 3.5% YoY - Liability-hedging allocations held steady at 53% - Expected returns jumped from 5.6% → 6.5% over the last couple of years Public Pensions - Only 51% met or exceeded return targets over the past decade - Risk remains concentrated in economic growth factors - Funded ratios rose to 78% in FY2024 - Growth assets dominate, with 44% in public equities and 34% in alternatives These are signals that should be sparking conversations in every boardroom. With the right analytics and scenario testing, these insights can help boards make sharper, more informed decisions. Want to see how your plan stacks up? Explore our peer studies: https://1blk.co/4m7Bef9

There was an important article in the Wall Street Journal over the weekend about pension funds, private equity, zombie funds, and NAV loans. The article (“Pensions Piled Into Private Equity. Now They Can’t Get Out”; linked in the comments) flags a trend where state and private pension funds, having invested billions of dollars with private equity managers, are stuck with sunk cash in the funds, continuing requirements to fund capital contributions, lackluster payouts, and demands to free up cash to pay out retiree benefits. Major takeaways are below: 👉 CALPERS (California’s state worker pension) has been paying more money into its private equity portfolio than it received for eight years in a row. 👉 Private equity funds typically have a 10 year investment period before they liquidate assets and pay out returns, but the interim estimates of fund value during that time may not be reliable, particularly because fund managers, who are paid as a percentage of the asset valuation, are incentivized to boost those valuations. 👉 The cause of the slowed distributions is the difficulty that private equity funds are having selling their companies in an environment where high interest rates have made buying and owning companies more expensive for prospective purchasers. 👉 The lack of quality exit opportunities has resulted in “zombie funds” – funds that did not pay out on the expected timetable and continue to hold illiquid assets of uncertain value. 👉 One solution to the log jam is the sale of interests in private equity funds to secondary market buyers, though often at a steep discount (Jefferies found that the discount was an average of 85% of the valuation right before the sale). 👉 Some pension funds are borrowing to access cash in order to pay distributions to retirees. I suspect such a loan would be collateralized by all assets of the pension fund, including its interests in private equity funds. 👉 In a #fundfinance angle, the article notes that The Alaska Permanent Fund has received cash distributions as a result of NAV loans taken out by the private equity funds in which it invests. But Alaska’s investment chief is not thrilled about this approach because he estimates that Alaska could borrow on its own at a lower cost than the NAV loans. As interest rates continue to remain high with no promise of near term relief and cash starved pension funds search for money to pay benefits, the opportunities for #fundfinance as a solution in this space seem likely. This could be either in the form of NAV loans to the private equity funds that are then distributed to the investors – which have their share of controversy as noted in the article – or loans to the pension funds themselves. One thing is for sure: this liquidity shortage will likely create opportunities for creative and hungry bankers to land new deals and clients.

FT - Private equity portfolios underperform at big Canadian investors Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec have all lagged their benchmarks over the past year, according to their latest reports. Managers of the pension funds say their portfolios have performed as expected on a long-term view and are designed to rise less than wider stock markets in years of high growth while benefiting from limited losses in more difficult periods. CPPIB, which manages $516bn pension assets reported this week that its allocation to private equity — which makes up 23% of the core portfolio — had been the biggest relative drag on its performance over the past five years. Canada’s state pension fund manager said it was “not immune to short-term market shifts” and that on a 10-year basis it had performed as designed, with private equity delivering more than its reference measure. Omers is the only one of the four funds to have outperformed its benchmark...…but it also has the lowest benchmark. The private equity portfolio of Ontario Teachers’ Pension Plan, which has C$266bn of assets, delivered about half that of its benchmark portfolio of largely listed equities. OTPP said private equity had been “a highly profitable asset class for Ontario Teachers’ and remains an area of focus for the plan”. https://lnkd.in/eckezUmd

The Department of Labor just proposed opening 401(k) plans to alternative investments. Private equity. Private credit. Real estate. Crypto. $10.1 trillion in retirement capital, one rule change away from private markets. Sounds like a win. But 25 years of pension fund data tell a complicated story. Listed REITs returned 9.7% annually. The average private real estate operator returned 7.7%. The public version beat the private version for 25 years. Top-quartile private real estate operators? They returned 21%. Same asset class. Same 25 years. The difference is who's running the deal. We unpacked the full dataset, the Bogle vs. Swensen debate, and what actually separates average operators from top-quartile ones in this week's Wealth Stack Weekly. Join 500,000+ subscribers 👇 www.wealthstackweekly.com

St. James’s Place (SJP) is one of the biggest names in the UK wealth management industry. Its flagship Strategic Managed Pension Fund is sold as a balanced, professionally managed solution for retirement savers. But the performance data shows something far less flattering: mediocrity that costs investors dearly. The 5-Year Reality From 2020 to 2024, the fund produced a total return of +28.3%, which works out to just 5.1% per year (CAGR). Period (2020–2024) Annual Return 2020: –2.73% 2021: +12.71% 2022: –5.64% 2023: +11.11% 2024: +11.62% On £100,000 invested at the start of 2020, you’d now have just £128,299. Meanwhile: MSCI World returned ~+84% (~13% p.a.). FTSE All-Share delivered ~+72% (~11.5% p.a.). So SJP’s flagship fund wasn’t just a little behind. It was in a different league altogether. The Long-Term Cost of Mediocrity The real damage isn’t visible in five years - it’s in 20. Compounding is merciless. A saver sticking with SJP ends up with £270k. The same money in a global tracker compounds to £1.15m. That’s a gap of £880,000. The difference between a modest retirement and a wealthy one. Why the Underperformance? High fees: SJP charges are notorious. The ongoing costs are multiple times higher than cheap global index funds. Fees compound too - against you. Missed opportunities: The fund failed to capture the huge global equity boom of the last five years. Even the UK market, often maligned for its lack of tech giants, left SJP in the dust. Volatility without reward: Investors took hits in 2020 and 2022, but were not compensated with outsized gains in the following years. The Verdict SJP’s Strategic Managed Pension Fund is marketed as safe, stable and well-managed. The numbers show something else: a slow-growth vehicle that lags both UK and global markets, while charging higher fees. It hasn’t protected investors. It hasn’t beaten benchmarks. And it hasn’t delivered the compounding that pension savers desperately need. The lesson is brutal but clear: in pensions, mediocrity is not safe - it’s expensive. If you want your money to work for you, you don’t just need returns. You need the right returns. And SJP’s flagship fund has failed that test.