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: 24.0%
Real estate: 7.4%
Alternative investments: 19.4%
Cash & Other: 2.0%
Since 1989, on a national basis, investment earnings have accounted for approximately 63 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 "Creating an Investment Policy," states in part:
A written investment policy is the single most important element in a public fund's investment program. An investment policy should describe the most prudent primary objectives for a sound policy: safety, liquidity, and yield. It should also indicate the type of instruments eligible for purchase by a government entity, the investment process, and the management of a portfolio. Such a policy improves the quality of decisions and demonstrates a commitment to the fiduciary care of public funds, with emphasis on balancing safety of principal and liquidity with yield. Adherence to an investment policy signals to rating agencies, the capital markets and the public that a government entity is well managed and is earning interest income suitable to its situation and economic environment.
Recommendation. The Government Finance Officers Association (GFOA) recommends that all governing bodies adopt a comprehensive written investment policy and review and update its policies, if necessary on an annual basis.
Latest investment return assumptions, March 2021
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: How Much Risk a Fund Requires to Reach a 7.5% Return, Callan, September 2016
Risky Business Update: Challenges Remain for Today's Investors, Julia Moriarty, February 2019
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
Best Practice: Investment Fee Policies for Retirement Systems, Government Finance Officers Association, September 2014
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