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Aaron Brown

Alternative Assets Have Made Pension Funds Safer

There’s overwhelming evidence that moving away from stocks and bonds has made public and private retirement plans less risky.

How safe is your retirement money?

How safe is your retirement money?

Photographer: Michael Steele/Getty Images

Pennsylvania teachers may have been distressed by a recent New York Times article saying that the state’s retirement fund run for their benefit “put more than half its assets into risky alternative investments” and that “the math didn’t work out, spurring an investigation.” But the news, for Pennsylvania teachers and public pension funds in general, is much better than the headlines suggest.

Let’s start with the idea of “risky alternative investments” that gets thrown around way too much when it’s used to describe pension fund assets. Traditional investments are publicly-traded stocks and bonds, which make up 57% of the Pennsylvania fund’s assets. Everything else, risky or not, is classified as “alternative.” Most institutional portfolios — pension funds, endowments, sovereign wealth funds and others — have increased their alternative investments from around 5% or less in 2000 to 30% or more. The result has been to lower risk dramatically and to increase returns. And the 2021 annual reports from pension funds should show a great benefit from alternatives.