Public Pensions Adapt to Market Volatility, Inflation

Public pension plan sponsors have found ways to adapt their portfolios to prolonged market volatility, elevated inflation and the advent of new, artificial-intelligence-enabled technologies, according to the National Conference on Public Employee Retirement Systems’ 2026 “Public Retirement Systems Study” released Thursday.

Despite a slight dip in the average funding status year-over-year, to 79.2% for plans with fiscal year-end dates falling in the first half of 2025, down from 81.4% for the same period in 2024, plan sponsors are weathering short-term market disruptions in the bigger picture.

“As long-term investors, public pensions are built for exactly these moments,” NCPERS CEO Hank Kim said in a statement. “This year’s study shows systems staying focused on disciplined funding policies, diversified asset allocation and operational efficiencies—even as markets and inflation remain unpredictable.”

Shifting Allocations to Manage Investment Risk

From an asset allocation perspective, public pension investors have adjusted their portfolio strategies to balance risk-and-return objectives. The data collected in the report reflected a broad trend toward relatively lower allocations to equity—38% in the first half of 2025, compared with 51.4% in the same period in 2021—and slightly increased allocations to fixed income: 24.5% in H1 2025, up from from 22% in H1 2021. Total allocations to alternative investments increased, as well, to 31.8% in H1 2025 from 24.5% in H1 2021.

Plans with fiscal year-end dates in the first half of 2025 reported the following average investment returns, net of fees:

• 1-year returns of 10.2%;
• 5-year returns of 9.7%;
• 10-year returns of 7.5%; and
• 20-year returns of 7.2%.

Combined average investment manager and administrative expenses for systems with fiscal year-end dates in the second half of 2025 were approximately 70 basis points.

Funding Discipline Matters

Plans that consistently received their full actuarially determined contributions continued to post stronger funding outcomes, according to the report. Retirement systems that received their full contributions reported funding ratios averaging 6.6 percentage points higher than those that did not, consistent with the 2025 study’s findings.

The median discount rate remained stable at 7% across all defined benefit and hybrid plans from the first half of 2021 through that period of 2025. The average for all non-defined-contribution plans declined to 6.92% across the period, with systems ending their fiscal year in the first half of 2025 averaging 6.67%, down from 6.77% in in that period one year earlier.

Many systems reported implementing funding-focused adjustments in recent years, most commonly lowering assumed rates of return. Some 7.5% of pension funds reported lowering their ARR within the past year, and 57.9% said they had done so more than one year ago. Additionally, 7% reported having increased employer contributions in the past year, while 26.6% said they had done so more than a year ago. A smaller share of those surveyed reported increasing the age or service required for benefits eligibility: 1.6% did so within the last year, and 32.8% more than a year ago.

AI Use Increases

While plan sponsors have taken a cautious approach to adoption of artificial intelligence tools, the pace picked up significantly in the time period covered by the report. Among all respondents to the study, 35.6% reported implementing AI for at least one purpose within their organization.

Sponsors reported using AI most often in fraud detection and prevention (28%, up 25 percentage points from last year’s study); predictive analysis for actuarial forecasting (26.8%, up nearly 15 percentage points); participant communication and customer service (26%, up 14 percentage points), enhanced data modeling for investment opportunities (26.6%, up almost 24 percentage points), and automation of administrative tasks (25.8%, up nearly 15 percentage points). For each use case, between 58% and 66% of respondents reported that they were considering using AI applications in the future.

Priorities for 2026

Looking ahead, 70.4% of respondents said sustaining target pension funding levels was a top priority. Improving pension administration systems was a top priority for 55.7% of respondents, and cybersecurity and fraud prevention was cited by 54.8%. Less commonly, 21.7% of respondents named onboarding new members and staff as a top priority, and 21.7% identified responding to legislation; determining AI’s role was cited by 7%; and 0.9% named managing political pressure as a top objective.

The study was conducted in fall 2025, collecting responses from 149 public pension plan sponsors serving approximately 18.1 million members.