Diversification aids pension funds
Industry report highlights how investing has evolved in the 21st century
By Michael Pramik, Ohio Public Employees Retirement System
July 3, 2025 – Pension plan investing has evolved in the 21st century, shifting from a reliance on traditional stocks and bonds to broader portfolios built to grow steadily and endure market turbulence.
That’s the focus of a recent report by the National Institute on Retirement Security titled, “Evolution and Growth: How Public Pension Plans Have Diversified Their Investments Amid Changing Markets.” Report co-author Tyler Reed says that public pension funds have a responsibility “to adapt and deliver reliable benefits for public service employees.
“The data shows that, over time, public pension funds have diversified their investment portfolios, allocating capital across public and private equity, real estate, hedge funds, and other alternative assets,” he said. “This strategic diversification has helped them consistently provide stable and reliable retirement income to workers, even through changing market conditions.”
Here are some of the report’s highlights:
- Public pension portfolios have become significantly more diversified. Between 2001 and 2023, the average public plan shifted about 20% of its assets out of traditional public equities and fixed income, reallocating them to alternatives such as private equity and real estate.
- The shift in focus from municipal bonds to prudent investing reshaped strategy. In their early years, public pension plans primarily invested in municipal bonds under a philosophy of “fiscal mutualism.” By the mid-20th century, most had adopted the “prudent investor rule,” enabling a broader range of investments and setting the stage for today’s diversified portfolios.
- Evolving market dynamics spurred portfolio adjustments. Factors like persistently low interest rates and a shrinking pool of publicly traded companies have prompted public pension plans to adapt their investment strategies to a changing financial landscape.
- Ultra-low interest rates marked a turning point. In the wake of the Great Recession, a decade of historically low rates reshaped how public plans approached investing, driving increased allocations to alternative assets in search of yield.
- Diversified portfolios have delivered stronger performance. Compared with traditional 60/40 or 70/30 stock/bond strategies, the more diversified portfolios adopted by public plans have generally outperformed since the financial crisis—net of fees—while offering greater stability and improved performance in both up and down markets.
- Public plans have more often met return targets in recent years. Over rolling five- and 10-year periods, diversified pension portfolios have more consistently achieved or exceeded their actuarial return assumptions, especially as those assumptions have moderated. These portfolios outperformed traditional models not only in returns, but also in meeting long-term expectations.
You can learn more about OPERS investments by reading our 2025 Annual Investment Plan on the Investments section of the OPERS website.
Michael Pramik
Michael Pramik is communication strategist for the Ohio Public Employees Retirement System and editor of the PERSpective blog. As an experienced business journalist, he clarifies complex pension policies and helps members make smart choices to secure their retirement.