Pension funds have traditionally invested in global bond markets which offer predictable income and support stable portfolios. This column documents a recent shift in pension investing away from fixed-income securities and towards riskier and less liquid assets. A search for yield is an important reason for this change, along with the transition from defined benefit to defined contribution pension systems. This transformation presents opportunities for higher returns and more diversification, but also exposes bond markets and pension funds to more risk during volatile periods.
Pension fund investors have been typically viewed as some of the most dependable investors in global bond markets. Their long-term obligations make government and corporate debt a natural fit: bonds offer predictable income which matches future retirement payments, and support relatively stable portfolios. However, that relationship is changing. Recent research has shown that demand shifts by pensions move asset prices and that they in turn respond to yield curves. For example, Aldunate et al. (2025) show that Chilean pension fund flows impact the exchange rate and deviations in covered interest parity through bank liquidity. Relatedly, Jansen (2025) finds that pension funds and insurance companies responded to a Dutch reform that made liabilities more sensitive to the yield curve.
In our recent paper (Ding et al. 2026), we document a broad transformation in pension investing on a global scale. Across the US, advanced European economies, and emerging markets, pension funds have steadily reduced the share of their portfolios invested in fixed-income securities. At the same time, they have increased their exposure to mutual funds, foreign assets, and alternatives such as private equity, real estate, private credit, infrastructure, and hedge funds.
This finding has the potential for significant financial market implications since pension funds manage enormous pools of capital and have traditionally served as stable, long-term lenders to governments and companies. When they change how they invest, the consequences can spread through debt markets, borrowing costs, and financial stability.
A global retreat from bonds
The paper’s central finding is striking. Pension funds around the world are moving away from bonds as a share of their total assets. As shown in Figure 1 (a) for the US, fixed-income securities represented close to 40% of pension assets in the early 1980s. By 2023, that share had fallen to roughly 10-15%. Over the same period, mutual fund holdings rose from almost nothing to more than one-quarter of pension portfolios. A similar pattern appears in advanced European economies in Figure 1 (b). Since the early 2000s, their fixed-income allocation has fallen from approximately 35% to around 20%. Mutual fund shares, meanwhile, increased from below 20% to more than 50% by 2023. Although emerging-market pension funds started from a much higher bond allocation, they also showed a decline in holdings of fixed-income investments as highlighted in Figure 1 (c).
These changes in portfolio allocations matter because they reveal a common international trend despite major differences in pension systems, regulations, financial development, and economic conditions. It is a structural shift occurring across much of the global pension industry.
Figure 1 Pension fund asset allocation around the globe
Notes: The figure shows aggregate pension fund asset holdings for the US (in panel a), advanced European economies (panel b), and emerging market economies (panel c). Data are from the OECD Global Pension Statistics that span 1980 to 2023 for the US, and 2001-2023 for advanced European economies and emerging market economies. The sample includes only countries with continuous time coverage and no missing observations in any asset category (cash, bonds, equity, and mutual fund shares). Advanced European economies include Denmark, Germany, Italy, Portugal, Spain, and Switzerland. Emerging market economies include Bulgaria, Chile, Colombia, Estonia, Israel, and Peru. Asset values are aggregated across countries within each group in nominal US dollars.
Is the bond exposure merely hidden?
The rise of mutual fund investing creates a potential measurement issue in this finding, however. A pension may sell bonds and buy shares in a bond fund, meaning its direct bond holdings fall while its underlying economic exposure remains largely unchanged. We address this issue with ‘look-through’ analysis. Using data for several advanced European countries, we combine bonds held directly by pension funds with bonds held indirectly through mutual funds.
The results shown in Figure 2 suggest that the shift is real, at least for these countries. Pension funds have increased some of their indirect bond exposure, but not enough to offset the decline in directly held bonds.
Switzerland provides a useful example. Direct bond holdings fell from slightly above 25% of pension assets in 2008 to a little over 5% in 2023. Indirect exposure through mutual funds increased, but total fixed-income exposure still declined from roughly 40% to below 30%.
Across the countries examined, the evidence indicates that pensions are not merely repackaging the same bond investments. Their overall exposure to fixed income is genuinely declining.
Figure 2 Direct and indirect bond exposure of pension funds in advanced European economies
Notes: The figure reports pension fund exposure to bonds through direct holdings and through mutual funds. The sample includes advanced European economies with available breakdown data (Germany, Italy, Portugal, Norway, and Switzerland) over the period 2008-2023. Direct bond holdings correspond to debt securities held outright by pension funds. Indirect bond exposure is calculated as pension fund holdings of mutual funds multiplied by the reported bond share within those funds. Asset shares are expressed as a percentage of total pension fund assets. Data are from the OECD Global Pension Statistics.
The rise of riskier and less liquid assets
Where is the pension money going? Part of the money is flowing into mutual funds, which can provide exposure to equities, international markets, and diversified investment strategies. A growing share is also being allocated to alternatives, including private equity, private credit, real estate, infrastructure, natural resources, and hedge funds.
Among US state and local pension plans, Figure 3 shows that alternative investments rose from less than 10% of total assets in the early 2000s to more than 30% in 2024. Our paper shows significant alternative allocations among pension funds in Canada, the euro area, the UK, Switzerland, and Australia, as well.
Figure 3 Alternative investments in US state and local pension portfolios
Notes: This figure shows the evolution of alternative investment holdings of US state and local pension funds. Alternative assets include private equity, real estate, hedge funds, and other alternative investments. Asset shares are expressed as a percentage of total assets managed by these pension funds. Data are from the US Public Plans Database.
There may be plausible reasons for this move. Alternative assets can offer higher expected returns and greater diversification. Moreover, private equity gives pensions access to companies outside of public stock markets. Further, infrastructure and real estate may produce long-term cash flows that align with retirement liabilities. And private credit can provide additional income when traditional bond yields are unattractive.
But these benefits come with trade-offs. Alternative assets tend to be less liquid, less transparent, more difficult to value, and often more expensive to manage. Reported values may also adjust slowly during market downturns, creating an appearance of stability that does not necessarily reflect the assets’ underlying economic risk.
The shift from defined benefit to defined contribution is not the whole explanation
One reason for this structural change may be another major institutional change: a global shift away from defined benefit (DB) programmes towards defined contribution (DC) programmes. As shown in Figure 4(a) using the countries with available data, the share of defined benefit programmes has declined while the share of defined contribution programmes has increased globally. Figure 4(b) shows the same pattern for advanced European economies since 2009.
Figure 4 The composition of defined benefit and defined contribution plans
Note: The figure reports the share of defined benefit and defined contribution plans. Panel (a) reports the aggregate shares using the balanced sample with no missing data, including Albania, Bulgaria, Switzerland, Czech Republic, Denmark, Spain, Finland, Hong Kong (China), Hungary, Israel, Italy, Luxembourg, Nigeria, Norway, Portugal, Turkey, and the US. Panel (b) reports the shares of advanced European economies using the balanced sample with no missing data, including Bulgaria, Spain, Finland, Italy, Luxembourg, and Portugal.
A defined benefit plan promises workers a predetermined retirement income. By contrast, a defined contribution plan instead places money in the worker’s account so that the individual ultimately bears the risk. Thus, defined contribution plans typically hold riskier assets than defined benefit plans. Further, because defined contribution plans commonly use mutual funds and target-date funds, it would be reasonable to assume that the growth of defined contribution pensions explains the movement away from bonds.
Our paper finds that this trend is only part of the story. Both defined benefit and defined contribution plans have reduced their direct fixed-income holdings and increased their mutual fund allocations. The expansion of defined contribution plans amplifies the aggregate change, but it does not fully explain it. Overall, changes in plan design matter, but a broader economic force appears to be influencing the entire pension sector.
Low interest rates and the search for yield
One such economic force may be the long decline in interest rates. Bonds become less attractive to pension funds when interest income falls. This loss is particularly challenging for defined benefit plans, which must earn enough to meet predetermined commitments. A prolonged low-rate environment can push funds toward investments offering higher expected returns, even when those investments involve greater risk, complexity, or illiquidity.
Using annual data covering 87 countries from 1980 to 2023, our paper examines how pension allocations vary with ten-year government bond yields. We find that a one-percentage-point decline in the domestic yield is associated with approximately a one-percentage-point decline in the pension portfolio’s bond share, but a 1.5-percentage-point increase in mutual fund shares and an outsized three-percentage-point increase in foreign assets. These patterns are consistent with pensions looking beyond domestic markets when local yields are low.
Defined benefit plans appear more sensitive than defined contribution plans. A one-percentage-point decline in government bond yields is associated with about a 1.4-percentage-point reduction in the bond allocation of defined benefit funds and an approximately three-percentage-point increase in their foreign-asset share. This evidence strongly supports a general search-for-yield mechanism as an important part of the story.
What this means for debt markets and retirement finance
Pension funds are often regarded as the ‘stable hands’ of bond markets (e.g. Zhou 2024). Their liabilities extend decades into the future, allowing them to buy long-term debt and hold it through periods of volatility. If pensions retreat from fixed income, however, other investors must take their place.
This paper highlights a novel trade-off implied by changes in pension allocations. Investment funds and other non-bank financial institutions can be more responsive to prices (Fang et al. 2025). Thus, moving pension allocations towards more price-sensitive investors such as those managed by mutual funds may make it easier for governments and companies to sell additional debt. Our illustrative calculation suggests that when long-term investors’ market share falls from one-half to one-third, the yield increase associated with a 10% rise in debt issuance declines from 21 basis points to 18.7 basis points.
That sounds beneficial, but it has a costly counterpart that manifests in two ways. First, as pension funds step back from government and other bond markets, other non-bank financial institutions step in. These non-bank financial institutions may be more likely to sell during periods of stress. Second, a substantial literature documents that bond mutual funds are vulnerable to flow-induced price pressure and fragility (Vissing-Jorgensen 2021, Ma et al. 2022, Coppola 2025, Fang and Goldstein 2025). Thus, sudden adjustments in pension portfolios or redemption demands can put outflow pressure on mutual funds, which may in turn amplify or transmit those shocks to the bond markets they invest in. A market dominated by more mobile investors may react more sharply to uncertainty. For example, the UK’s liability-driven investment (LDI) crisis demonstrates how quickly stress in pension funds’ holdings of LDI fund shares can spill into government bond markets. Our paper calculates that a large decline in pension ownership could double the response of bond yields to a global volatility shock.
Governments and companies may therefore gain an investor base that absorbs new debt more elastically in normal conditions but becomes less reliable during turmoil. Borrowing may be marginally easier when markets are calm and significantly more fragile during volatile periods.
The transformation documented in the paper has consequences for pension funds’ beneficiaries. For retirees and plan sponsors, greater exposure to equities, foreign markets, mutual funds, and alternatives may improve long-term returns. It may also increase vulnerability to stock-market declines, liquidity pressures, valuation uncertainty, and costly investment structures.
The structural changes in pension fund allocations are particularly urgent because public debt has expanded while populations are ageing. Governments need reliable buyers for growing volumes of debt at the same time that retirement systems need dependable returns for a rising number of beneficiaries. Accounting for the structure and investment of pension funds is crucial for responding to these challenges.
Source : VOXeu
