Public pension fund assets are invested in diversified portfolios that include public equities; bonds issued by the U.S. and foreign governments and corporations; real estate; alternatives, such as private equities, hedge funds, and infrastructure; and other asset classes. Over time, earnings on investments constitute the largest portion of public pension fund revenues, which also include contributions from employers and employees.
Public pension asset allocations typically are developed as part of a process that considers the plan's liability stream, or projected benefit payments, expected revenue from contributions, and investment earnings.
Based on the latest information from the Public Fund Survey, the average public pension fund asset allocation is as follows:
Public equities: 47.1%
Fixed income: 21.2%
Real estate: 6.8%
Alternative investments: 22.6%
Cash & Other: 2.5%
Since 1991, on a national basis, investment earnings have accounted for approximately 60 percent of all public pension revenues. Investment earnings take the form chiefly of income from fixed income securities (bonds), and capital appreciation of equities. Investment earnings are the most volatile source of public pension revenue.
Most public funds maintain an investment policy to guide the investment of assets. A GFOA Best Practice "Investment Policy," states in part:
An investment policy enhances the quality of decision making and demonstrates a commitment to the fiduciary care of public funds, making it the most important element in a public funds investment program.
Recommendation. GFOA recommends that all governments establish a comprehensive written investment policy, which should be adopted by the governing body.
Latest investment return assumptions, May 2023
Public retirement system rebalancing policies, November 2020
Roll Call investment activities and asset allocations (members-only)
Best Practice: Investment Policies for Defined Benefit Plans, Government Finance Officers Association, October 2017
Risky Business Update: Rising Inflation and Continued Uncertainty Challenge Investors , Julia Moriarty, February 2022
Capital Market Assumptions, BlackRock
Investment Returns: Defined Benefit vs. Defined Contribution Plans, Center for Retirement Research, December 2015
Bringing Home the Investment: Building the Case for Internal Investment Management, Funston Advisory Services, June 2015
Bringing Home the Investment: What Does it Take to Make Internal Management Work?, Funston Advisory Services, June 2015
How Sensitive Is Public Pension Funding to Investment Returns, Center for Retirement Research, September 2013
Best Practice: Asset Allocation for Defined Benefit Plans, Government Finance Officers Association
Global Investment Performance Standards, CFA Institute, March 2010
Best Practices in the Hedge Fund Industry, Report of the Asset Managers' Committee to the President's Working Group on Financial Markets, January 2009
Principles and Best Practices for Hedge Fund Investors, Report of the Investors' Committee to the President's Working Group on Financial Markets, January 2009
CalPERS Investment Beliefs, California Public Employees' Retirement System
Private Equity Principles, International Limited Partner Association