A recent study by Goldman Sachs Asset Management (GSAM) (from Public Pension Viewpoints, Q2 2019) noted public pension plans reduced their equity allocation over 2017 and 2018. While high asset class returns and rebalancing contributed to this asset shift, strategic decisions also explained the additional 1.3% allocation to fixed income assets. GSAM suggested public plans made a decision “deemed prudent by some” and lowered investment risk, given domestic equity market outperformance and high valuations.
Within the equity asset class, GSAM also observed a shift to international and private equities to compensate for lower expected returns and capital market assumptions. Data included in this study revealed public plans held about 14.7% of plan assets in a combination of private equity, hedge funds, and real estate.
This equity reallocation mirrors a similar pattern in corporate pension plans, although some of the corporate shift was due to liability hedging programs. Also, both corporate and public plans reduced their expected rate of return assumptions to take into consideration this asset de-risking along with the overall change in capital market assumptions.