The Global Pensions Crisis: Be Prepared

While unfolding slowly, the world’s pension funds are facing a crisis. Long-term demographic changes and short-term market shocks are opening a gap between what they owe pension plan participants and what they can afford.

Nov 9, 2023|Market Insights- 3 min

Pension fund crisis

In this article we examine the extent and causes of the problem, and what can be done by individual investors to address it.

Under pressure

A report by the Thinking Ahead Institute released this year showed that the world’s largest pension funds experienced a drop of 12.9% in 2022, with assets falling from $23.6 trillion to $20.6 trillion by year-end.[1]

This fall, driven to a large extent by the dual decline of bonds and equities, was greater than the one experienced during the 2008 Financial Crisis. Since then, the continued rise in interest rates has caused headaches for funds who based their plans on continued low and stable rates.[2]

Most plans were fully funded in the year 2000, but have since lost ground owing to internal management and poor investing decisions that each successive financial crisis has magnified.[3]

Although the decade from 2010 to 2020 saw the largest bull market in history, pension funds were still only 85.5% funded by the end of 2021.[4]

To remedy this, funds responded by adopting higher leverage, making riskier bets, or both.[5] In 2022, one of the United States' largest pension funds, CalPERS, borrowed money to invest for the first time in its 90-year history. Meanwhile, other major funds began investing in the troubled cryptocurrency sector.[6]

This is worrying for observers, as it increases the possibility of underperformance even further. As early as 2019, the Boston Federal Reserve commented, “Risk-taking behavior is most pronounced among funds with sponsors with the least ability to bear additional risk.”[7]

Deeper challenges

The troubled macro environment looks set to continue. High inflation and market volatility will likely persist in the coming years, as the geopolitical order rebalances.

But even assuming a positive economic environment, there are fundamental pressures on traditional pension schemes that have not been addressed.

Aging populations and falling birth rates will mean lower contributions to workplace pension schemes, just as the number of retirees is growing. Furthermore, more people than ever are living into old age, meaning longer retirements with higher funding requirements.[8]

The shift from Defined Benefit (DB) to Defined Contribution (DC) schemes means that there is no longer a guaranteed sufficient lifelong income for these individuals, and those with barely sufficient assets are at the mercy of the markets.

Working longer is one way to address the above issues. However, studies have shown that even those who aspire to work longer often retire sooner than planned, whether owing to ill health, redundancy, or another change of circumstance such as needing to care for a spouse.[9]

What individual investors can do

While the future of institutional pension funds may be challenged, there are still options for individuals to secure their financial future.

Rather than trusting to pension funds, many individuals are taking greater control of their future and building additional funds outside the traditional structure. Working with a professional portfolio manager or, better still, an experienced firm, can be a way to bypass the turmoil engulfing the pension industry.

Not only is it possible to take control, but in the current market, it is also possible to find higher returns in non-public opportunities, such as private debt, private equity, and real estate. While sourcing and evaluating such deals requires expertise, it provides an effective way to future-proof your portfolio.

The Family Office specializes in private markets investments as a means of outperforming the traditional options open to investors. As the world transitions to the next phase in financial markets, this new approach may become the new normal.

[1] Thinking Ahead Institute

[2] Reuters

[3] Fortune

[4] CNN

[5] Wall Street Journal


[7] Institutional Investor

[8] Brookings

[9] CNBC

About The Family Office

Since 2004, The Family Office has been the wealth manager of choice for more than 500 ultra-high-net worth families and individuals, helping them preserve and growth their wealth through customized solutions in diversified alternatives and more. Schedule a call with our financial experts and learn more about our wealth management process.

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