The Bank for International Settlements (BIS) has indicated that global pension funds now rank among the world’s largest institutional investors, playing a vital role in government and corporate bond markets. A recent BIS paper reveals various changes in their portfolio strategies over recent decades, with significant consequences for borrowers as well as overall financial stability.
The analysis, drawing on data from the OECD, US financial accounts, and other sources across advanced economies (AEs) and emerging markets (EMEs), shows a consistent global pattern: pension funds have steadily reduced direct holdings of fixed-income securities while increasing allocations to mutual funds and alternative investments.
In the United States, the share of fixed-income assets in pension portfolios dropped from nearly 40% in the early 1980s to around 10-15% by 2023.
Mutual fund shares, by contrast, surged from negligible levels to about 30%. Similar trends appear elsewhere.
Advanced European pensions saw bond holdings fall from 35% in the early 2000s to under 20%, with mutual funds rising sharply.
In EMEs, where bonds once dominated at up to 80%, the share has halved to around 50%.
This reallocation extends beyond bonds to a broader move toward alternatives such as private equity, real estate, hedge funds, and infrastructure.
US state and local plans, for instance, lifted alternative allocations from below 10% in the early 2000s to over 30% recently.
Cross-country Preqin data confirm this shift in Canada, the euro area, the UK, Switzerland, and Australia, where alternatives now represent 15-30% of relevant pension assets.
The decline in fixed-income exposure affects both public and private debt. Detailed US data indicate reductions in holdings of Treasuries, agency securities, and municipal bonds, alongside more moderate cuts in corporate and other private debt.
Meanwhile, the industry has transitioned from defined-benefit (DB) to defined-contribution (DC) structures.
Both plan types show the same directional shift away from direct bonds toward mutual funds, though magnitudes differāDB plans often exhibit stronger moves in response to return pressures.
Researchers hypothesize that persistently low global interest rates have prompted this evolution.
As government bond yields fellāespecially after the Global Financial Crisis and during the post-COVID periodāpensions sought higher returns elsewhere to meet obligations and performance targets.
Econometric analysis across 87 countries supports this view: lower local-currency 10-year government bond yields correlate with reduced domestic bond shares and higher allocations to mutual funds and foreign assets.
The effect is strongest for foreign investments, followed by mutual funds, and more pronounced in DB plans.
Responses vary somewhat by region. EME pensions show greater sensitivity in domestic bond holdings to local yields, while AE funds more aggressively pursue foreign assets in low-rate environments, reflecting a search for yield.
Importantly, increased mutual fund holdings do not fully offset the drop in direct bond exposure; indirect bond investments via funds only partially compensate.
These changes carry broad ramifications. Traditionally, pensions have served as stable, long-term holders of bonds, providing price stability due to their predictable liabilities and buy-and-hold approach.
As they retreat from direct debt, other non-bank intermediariesāsuch as open-ended fundsāfill the gap.
These entities often prioritize liquidity and can experience procyclical flows, potentially increasing volatility in sovereign and corporate bond markets.
The shift may alter demand across maturities, as pensions favor longer-duration bonds, influencing the yield curve and borrowing costs.
For pensions themselves, greater exposure to riskier, less liquid alternatives heightens vulnerability to liquidity squeezes, as seen in the 2022 UK LDI crisis. Fire sales could then spill over, pressuring investment funds through redemptions.
While low rates have encouraged diversification and potential return enhancement, they have also transformed the investor base for global debt.
As governments and corporations issue more bonds, understanding these dynamics becomes essential for assessing financing conditions and systemic risks. The update from the BIS has now concluded that this structural evolution in pension investing underscores the interplay between monetary environments and capital allocation in global financial services ecosystems.