Among the trends public pensions should watch out for in 2026, according to a report from S&P Global, is rising portfolio risk stemming from growing allocations to private investments.
“We generally view private investments as higher risk due in part to their opacity as well as limited and inconsistent disclosure,” the firm stated in the report, citing a study from investment advisory firm Cliffwater that reported U.S. state pension funds nearly doubled their private investments over the past 10 years. “We see a notable increase in risk embedded within pension trusts.”
The report stated that rising market risk over the past decade resulted partly from public pensions adding more private market debt and private equity to their portfolios. S&P Global noted that because PE investments are illiquid and are typically locked up for more than 10 years, they could limit a pension plan’s flexibility to pay for benefits.
“These investments may be exposed to capital calls and complex fee structures, further limiting cash management,” the report stated. “Valuation risk due to subjectivity and delay is embedded within PE assets, which may lead to overstatement and risk imbalance.”
Increased leverage and influence among the largest private credit managers is also contributing to private investment risks. According to S&P Global Market Intelligence data, the five largest private credit fund managers’ combined assets under management rose 30% to approximately $2.1 trillion in 2025, while the combined AUM of the next 15 managers increased 15% to $1.7 trillion.
“This concentrated influence over the market heightens liquidity risk in private credit and adds to systemic risks,” the report stated. “Such risks can be passed to pension plans and their sponsors through lack of diversification in the plan’s asset portfolio.”
Some public pension funds are increasing their risk in pursuit of matching or surpassing their return assumptions, the report cautioned, “but this increasing allocation does not necessarily translate to an increase in the assumed return, given the national median assumption remained steady at 7%.”
Another risk cited by S&P Global is a “trend of increasing workplace disabilities since 2020 [which] shows no signs of slowing and could lead to increased pension costs.”
Regardless of the increased risks, S&P Global projected that strong investment gains will continue to boost funded levels this year, following an average return of between 11% and 12% for the fiscal year that ended June 30, 2025, on top of returns between 16% and 17% the previous fiscal year. The firm estimated that public pensions returned 8.5% during the first half of fiscal 2026.
Overall, S&P Global estimated that the average funded level for public pensions reached 81% in fiscal 2025, noting that funded ratios have improved every year since fiscal 2022, increasing nearly 10 percentage points during that time.
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