Pension Fund Analysis

𝐒𝐢𝐦𝐩𝐥𝐞 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬, 𝐂𝐨𝐦𝐩𝐥𝐞𝐱 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬: The Case for ... Doing Nothing? 🏖️ Most endowments and pension funds in the US follow a model similar to the aforementioned Yale Model: Large investment teams consisting of veteran investors, making active bets on managers, geographies and industries with the goal of outperforming the market over the long-term. Interestingly, that idea is being upstaged by one of their own. Steve Edmundson, CIO of the Nevada Public Employees’ Retirement System (NPERS), 𝐜𝐡𝐨𝐨𝐬𝐞𝐬 𝐭𝐨 (𝐦𝐨𝐬𝐭𝐥𝐲) 𝐝𝐨 𝐧𝐨𝐭𝐡𝐢𝐧𝐠 𝐚𝐭 𝐚𝐥𝐥. NPERS, to the most part, goes against the ideas of the Yale Model and its search for complexity. 𝐈𝐭𝐬 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐨𝐟 𝐫𝐨𝐮𝐠𝐡𝐥𝐲 66 𝐛𝐢𝐥𝐥𝐢𝐨𝐧 𝐝𝐨𝐥𝐥𝐚𝐫𝐬 (𝐚𝐬 𝐨𝐟 𝐌𝐚𝐫𝐜𝐡 2025) 𝐢𝐬 𝐭𝐨 𝐭𝐡𝐞 𝐦𝐨𝐬𝐭 𝐩𝐚𝐫𝐭 𝐢𝐧𝐯𝐞𝐬𝐭𝐞𝐝 𝐢𝐧 𝐩𝐚𝐬𝐬𝐢𝐯𝐞 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭𝐬:For US stocks (35%), they are invested in the S&P. For international stocks (14%), they are invested in MSCI World ex-US. For US bonds (28%), they hold US treasuries. The only exceptions are Private Real Estate and Private Equity (12% target allocation), which they have outsourced to external managers. 𝐀𝐧𝐝 𝐭𝐡𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬 𝐬𝐩𝐞𝐚𝐤 𝐟𝐨𝐫 𝐭𝐡𝐞𝐦𝐬𝐞𝐥𝐯𝐞𝐬: Since inception, NPERS has outperformed the market return by 0,3% p.a. Compare that to CalPERS, the largest public pension fund in the US, which employs a large investment team and makes active investments in liquid and illiquid assets - yet notoriously lags its benchmark over a 20-year period and just barely outperformed over 10- and 30-year periods. It’s interesting to see that large institutional investors suffer from the same level of “ego” that I personally see in affluent investors (and admittedly, sometimes myself): We have a top-notch team, we are smarter than other investors - we can generate alpha, we can outperform the market. But can they, really? Often, the numbers tell a different story. But to me, there's an even more important learning. Many of our affluent clients think that they need to invest differently from the average retail investor simply because they have more investable capital (and maybe my many newsletter about PE and other alts don't help). After all, that level of investable capital is needed to access some asset classes in the first place, such as private equity or hedge funds, and the recent push by GPs into fundraising from affluent individuals doesn’t help either. But it’s especially in such a moment where I like to highlight the story of NPERS: It’s a massive pool of capital, run by a tiny investing team, that actively chose not to make active choices - and that is succeeding with that strategy.

🇪🇺𝗘𝘂𝗿𝗼𝗽𝗲’𝘀 𝗣𝗲𝗻𝘀𝗶𝗼𝗻 𝗧𝗶𝗺𝗲𝗯𝗼𝗺𝗯 𝗜𝘀 𝗔𝗹𝗿𝗲𝗮𝗱𝘆 𝗗𝗲𝘁𝗼𝗻𝗮𝘁𝗶𝗻𝗴, 𝗮𝗻𝗱 𝗠𝗼𝘀𝘁 𝗥𝗲𝘁𝗶𝗿𝗲𝗲𝘀 𝗗𝗼𝗻’𝘁 𝗞𝗻𝗼𝘄 𝗜𝘁 𝗬𝗲𝘁. 💣 📊 A new dataset recently published by Datapulse Research has mapped pension income against average household expenses across Europe. The underlying figures draw on Eurostat data adjusted to 2023 price levels, the most recent Eurostat pension income figures currently available. The picture is brutal. Only four countries, Romania, Czech Republic, Poland, and Spain, deliver pension income that actually covers what retirement costs. Every other measured nation runs a deficit. In Croatia, Slovenia, and Hungary, retirees receive barely 60 cents for every euro they need to spend. These are not projections. This is 2023 actuality. 🌐 The World Economic Forum has long warned of a global pension savings deficit gap running into the tens of trillions of euros, driven by three compounding forces: longevity extension, declining state fiscal capacity, and chronically low contribution rates among working age populations. The EU 27 average, a 20% shortfall on a €17,300 pension against €21,700 in average expenses, sits almost precisely where WEF modelling predicted. The crisis is no longer predicted. It is now here. One counterintuitive finding deserves attention. Higher pension values do not guarantee adequacy. Luxembourg pays retirees €34,400 annually yet runs a 34% deficit because average expenses reach €52,200. Norway pays €29,200 but faces a 37% gap against €46,100 in costs. This is a cost of living problem as much as a pension design problem, and conflating the two has allowed policymakers to avoid the harder conversation for too long. 🇮🇪 𝗜𝗿𝗲𝗹𝗮𝗻𝗱 𝘀𝗶𝘁𝘀 𝘂𝗻𝗰𝗼𝗺𝗳𝗼𝗿𝘁𝗮𝗯𝗹𝘆 𝗶𝗻 𝘁𝗵𝗶𝘀 𝘀𝘁𝗼𝗿𝘆. A pension of €24,000 against average expenses of €32,300 produces a 25% shortfall, placing Ireland in the lower third of the European table. Ireland’s nominal pension figure is among the higher values in the dataset. Its cost base consumes that advantage entirely. Beneath the headline number lies something more troubling. The average Irish private pension fund stands at approximately €111,000. Converted to an annuity, that delivers annual income of just €4,400 to €5,500. That is the accumulated retirement capital of a typical Irish worker after a full career of contributions. Combined with the State pension, the median Irish retiree still lands well short of what daily life in this country actually costs. For an economy that regularly tops European GDP per capita rankings, this is a structural failure. Auto enrolment has arrived, it will assist pension coverage, but is unlikely to have a significant funding deficit or adequacy impact. There is a huge financial literacy gap at the root of these numbers. The crisis is not just mathematical. It is also behavioural. #PensionCrisis #RetirementReality #EuropeanPensions #PensionAdequacy #FinancialPlanning #FinancialLiteracy

Ask the average person in the street about their pensions and, at a guess, they’ll say around 40% of it is invested in UK shares. The reality is closer to 4%.   That gap has been a constant bugbear of mine. Our pension funds are overwhelmingly putting the savings of British people to work overseas - supporting other economies rather than our own. No other pension industry in any other country behaves in this way.    I've shared this Goldman Sachs chart before, but the message it conveys still strikes me. While countries like the US, Japan, and Australia invest heavily at home, the UK allocates a fraction by comparison.   The pension industry says that forcing them to invest more in UK equities would damage returns, undermine diversification, and breach fiduciary duty. Pension savers would suffer, they claim, even though the majority of people say they would support higher UK investment even at the cost of slightly lower returns.   Well, today we can explode some of the myths from the UK pension industry thanks to a new report from New Financial, shared with its members and government network.   The paper explores how an increased allocation to UK equities would have affected the performance of DC pensions over the past five years. When you look at actual outcomes – the returns argument - the picture becomes more uncomfortable for them.   New Financial’s modelling shows that a simple portfolio with 20–25% allocation to UK equities would have delivered annual returns of around 11% over the past five years. In every scenario that they measured, a UK-weighted portfolio would have beaten the performance of the majority of DC pension providers - and beaten the industry’s average performance.   In other words, even when UK equities have underperformed globally, increasing exposure to them would not have meaningfully harmed outcomes in practice - and would have improved them in the majority of cases.   Here is where the fiduciary duty argument really starts to unravel, when it is not even backed up by outcomes. Invoking it as a shield against change begins to look less like prudence and more like a convenient excuse.   This debate is often framed as a trade-off between patriotism and performance. In reality, it raises more fundamental questions over whether the current system is genuinely serving the long-term interests of millions of savers - and the wider economy, and the companies that need capital to grow and create jobs.   The Tesco employee diligently paying into their pension is, in effect, helping fund Walmart in the US. The Rolls-Royce engineer’s pension supports GE. The GSK scientists’ contributions bolster Pfizer.   There’s a fight for global capital going on, and we need to ensure UK capital supports UK growth.   Ministers should be reading this report carefully – and asking our pension funds some very hard questions.   #Pensions #Investing #UKMarkets #AssetAllocation #Finance

If your 401(k) adds “alternatives,” will it make you richer? Maybe. The newly proposed Department of Labor rule would make it easier for retirement plans to offer alternatives like private equity, private credit, and real estate. But access alone isn’t enough. In private markets, it’s operator selection that determines your outcome. This week, in Wealth Stack Weekly, we analyzed a 25-year institutional dataset (200+ pension plans, $4T+ in assets) showing that publicly traded REITs outperformed the average private real estate fund. The liquid, transparent version beat the illiquid, exclusive version. For 25 years. The obvious conclusion is that private markets must deliver lower returns. A more careful read is this: outcomes swing wildly based on who’s running the deal. Because the spread tells you everything. Bottom-quartile private real estate operators returned around 3%. Top-quartile private real estate operators returned roughly 21%. Same asset class. Same years. Different operators. Sophisticated operators make better business plans. They run smoother projects. They adapt to market headwinds with more agility. So if you’re an investor moving into private markets, here’s the operator-first playbook I use: 1. Underwrite the operator, not the asset class. “Multifamily” is a label. A real operator can tell you exactly what they buy, why they win, and how they’ve performed in bad years. Look for real alignment (meaningful co-invest) and a sharp thesis. 2. Build access before you need it. The best operators don’t “market” deals. They fill rounds with repeat LPs who’ve known them for years. 3. Concentrate when the opportunity justifies it. If you can’t pick operators, you diversify. If you can pick operators, you say no to 90% and allocate meaningfully to the 10% that earns it. Access to the private markets is becoming easier. But great private market returns will never be separated from picking great operators. Was this useful? We produce insights like this every week. Join 500,000+ subscribers: 👇 www.wealthstackweekly.com

💰 10 days ago I had dinner with a private equity (PE) veteran who walked me through a structural problem in the asset class that I had not fully appreciated before. PE attracts three main categories of limited partners: pension funds, sovereign wealth funds, and family offices. All share the same core challenge: they manage long-term liabilities and need their capital to work hard over decades. The problem is that delivering consistent long-term returns across asset classes is genuinely difficult. PE became so big because it offers a structural answer to that problem. By locking capital in for years, it removes the temptation to exit at the wrong moment and, in theory, generates a premium over public markets in return for that constraint. That illiquidity premium, combined with the difficulty of finding reliable long-term returns elsewhere, explains why institutional allocation to PE has grown so large. As explained by my friend, though, the case that once seemed solid looks different on closer inspection. 1️⃣ PE funds raise and deploy in synchronised cycles. When everyone deploys at once, target valuations rise. When funds then need to show performance ahead of their next raise, they try and generate liquidity, and sell their strongest assets. The buyer is usually another fund. Because most large LPs sit across multiple PE funds simultaneously, they pay an inflated entry price on the way in, and they pay again every time an asset rotates between vehicles, each transfer generating another round of fees and carried interest. 2️⃣ Management fees compound this. At 2% per year, that is roughly 10% over a standard fund life. When the same asset passes through two or three funds, the cost multiplies. According to Ludovic Phalippou, a finance professor at Saïd Business School, University of Oxford who has studied the industry in depth, total return drag from fees across their various forms reaches 6-7% annually. 3️⃣ The deeper problem is that the illiquidity premium appears to have been largely consumed. Academic studies show that PE's risk-adjusted returns now barely match public market equivalents. Cambridge Associates data puts PE outperformance versus the S&P 500 at near zero today, down from 500 basis points in the 1990s. Investors are accepting illiquidity, paying substantial fees, and receiving returns they could largely replicate in public markets. ➡️ The illiquidity premium was real. But when a system remains stable for long enough, it creates room for extraction to outpace value creation. The premium may have been largely arbitraged away, and the industry is overdue a reshuffle. Beyond that, the underlying problem still lacks a definitive solution: managing long-term liabilities over decades is one of the hardest problems in finance, and LPs are still looking for a reliable answer. -- I am Head of Research at Vsquared Ventures. Follow me here and subscribe to my personal newsletter Drift Signal to track my work. Views are my own.

A retired Colonel pushed back on me recently, and he was right. I had just shown him what his pension is worth. $115,000 a year, inflation-adjusted, for life: roughly $4 million in present value, an inflation-protected bond backed by the full faith and credit of the United States government. He stopped me. "Yes, I earned that over time. But it's not a lump sum. I can't compound it. I can't reinvest it. It shows up once a month and that's it." Every word of that is true. And it doesn't change the math. It completes it. The bond frame does three things. It establishes the floor. Essential spending is covered for life, regardless of markets. It measures risk capacity: a household with a $4 million bond underneath it can hold a more aggressive portfolio than any questionnaire would suggest. And it stops you from buying safety twice. A 40% bond allocation on top of a pension is paying for protection the household already owns. Now, what the bond frame doesn't do. It can't be compounded. The pension pays the same whether you spend it or save it. Growth has to come from somewhere else. It can't be accessed. There's no lump sum for the house, the business, or the emergency. Liquidity has to come from somewhere else. And it dies with him. Without survivor elections, it just stops, which means legacy is a job for other assets. That Colonel's objection is not a hole in the framework. It is the design brief for everything around the pension. The portfolio's job is everything the pension can't do. Growth. Liquidity. Something his wife can inherit. Which is why his $1.2 million portfolio holds almost no bonds. The pension is the best asset on his balance sheet. It's also the least flexible one. Most advice picks one of those truths and ignores the other. Either the pension gets counted as nothing because it isn't investable, or it gets waved at as "you're all set" because the income is guaranteed. The work is holding both. The pension is a bond you can't sell. Build everything else around it.