Public pension funds, endowments and foundations, and other institutional investors whose fiscal year ended June 30 are expected to report another year of solid returns, driven by strong returns in public equities and a continued rebound in the valuations of their private market portfolios.
While peer universe data is not yet available, and not all funds have finalized their reporting due to the one-quarter lag of private market performance, funds that have reported preliminary numbers are already sharing double-digit returns.
The California Public Employees’ Retirement System reported a 14.8% preliminary return for the last fiscal year, driven by gains in both public and private equity.
Indexes Up, Institutions to Follow
Laura Wirick, a managing principal and consultant at Meketa, notes that index returns can give indications of likely performance. A blend of the public equity and fixed-income results, based on the MSCI All Country World Index and Bloomberg Global Aggregate Index, returned 14.5% during the fiscal year.
“This level of performance is likely about double what many institutional funds need to achieve over the long term in order to meet distribution needs and keep pace with inflation,” Wirick says. “More equity-heavy portfolios and portfolios with more non-U.S. exposure will likely post higher returns. … Inflation-hedging assets like commodities, natural resources and gold also posted quite high returns. Portfolios that were more conservative and emphasize fixed income had weaker returns over the trailing fiscal year.”
The Russell 3000 Index, which tracks stocks of the largest public companies, returned 22.8%, and the MSCI Emerging Markets Index, which tracks large- and mid-cap stocks across 25 developing economies globally, returned 43.5% for the year ending June 30, Wirick adds. Both indexes outperformed the broader markets.
In its “2026 State of Pensions” report released Thursday, the Equable Institute estimated that public pension funds will report an average 9.37% return for the 2026 fiscal year, greater than the 6.88% assumed rate of return, and a 10-year average return of 8.68%.
“We have also seen a gradual decline in discount rates,” says Matt Eckel, director of research at the National Conference on Public Employee Retirement Systems. “For the first half of 2025, we’re down to an average discount rate of 6.67%, which is the lowest we’ve seen in a very long time, which does suggest a sort of broader focus on responsible governance and pensions that are making sure that they have secure funding and fiscal stability, and fiscal sustainability through what we know has been a very volatile period.”
Equable also estimated that funding ratios for public pension funds rose to an average of 85% during the fiscal year, up from 81.2% in fiscal 2025. Still, the funding deficit represents $1.3 trillion in unmet pension liabilities.
“Public plans have steadily improved their funding over the last several years thanks to record high contribution rates and steadily positive investment returns,” said Anthony Randazzo, Equable’s executive director, in a statement. “However, many states reporting strong funded status are relying heavily on the accuracy of private equity and real estate valuations. And all states are—intentionally or not—now relying on an [artificial-intelligence]-driven economy to propel them forward and prevent a funded status regression. This is a better position for the country than [a] year-over-year increase in unfunded liabilities, but there is no guarantee this recovery progress will persist.”
Equable’s report estimated that 8% to 10% of public pension assets in the U.S.—approximately $513 billion to $642 billion—are directly exposed to a basket of AI-related companies.
Asset Allocation
According to Equable, fiscal 2026 asset allocations were estimated to be 43.99% to equities, 23.79% to fixed income, 14.05% to private capital, 8.62% to real estate, 5.17% to commodities and miscellaneous assets, and 4.38% to hedge funds.
“We typically see shifts in asset allocation policy when there are major market moves like in the level of interest rates (which impact future asset class return expectations),” Wirick says. “Rates didn’t change much last year, and I think that’s one factor that contributed to many institutions deciding to ‘stay the course’ on their broad asset allocation strategies.”
There are some early indicators that public pension systems are adjusting their portfolio strategies. NCPERS’ Eckel reports that some allocators are shifting to “a moderately lower equity allocation, with increased allocations to fixed income, as systems are recalibrating portfolios, given the degree of market volatility that we’ve seen, as well as challenges in the interest-rate space.”
On Investors’ Minds
Wirick adds that some key themes and topics on the minds of institutional investors this fiscal year and next include the role of private market investments, risks related to market concentration, a potential AI bubble, active managers’ lagging index returns, and increased interest in quantitative and extension strategies.
“A high degree of geopolitical and regulatory risk [is] bringing to the fore the need to hedge against that kind of risk,” Eckel says. “Then outside [of market returns], we’ve seen a lot of at the attention at the management level focused on the rise of [artificial intelligence] and what that means for the day-to-day operations of how public pensions run their shops.”
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Tags: Equable Institute, Meketa, NCPERS, public pensions