Pension funds shift from bonds to riskier assets globally

A new Bank for International Settlements (BIS) paper documents a significant global reallocation in pension fund asset portfolios, moving away from traditional fixed income securities towards mutual fund shares and alternative investments.

This structural shift is evident across the United States, advanced European economies, and emerging market economies (EMEs).

US pension investors, for instance, reduced their fixed income holdings from nearly 40 percent in the early 1980s to approximately 10 percent by 2023, concurrently increasing their mutual fund shares to around 30 percent.

Similarly, advanced European economies experienced a decline in fixed income holdings from 35 percent in the early 2000s to less than 20 percent recently.

EME pensions saw a substantial drop from 80 percent to 50 percent over the same period.

The study also notes a shift from traditional investments to alternatives like private equity and hedge funds, providing diversification and higher potential returns.

The paper attributes the decline in fixed income allocation to both public and private debt, with US data providing detailed evidence.

A key hypothesis confirmed by the study is that declining local currency government bond yields are a primary driver of this global shift.

As returns on fixed income securities fell, pensions reallocated wealth towards other assets, including equities, mutual fund shares, and foreign assets.

This substitution is strongest for foreign assets, followed by mutual fund shares, and is particularly pronounced for defined benefit (DB) plans.

EME investors' domestic bond holdings show higher sensitivity to domestic bond yields, while AE pension investors more aggressively shift to foreign assets in a 'search for yield' strategy.