The Pension Fund Crisis: Why Your Retirement Might Be Funding High-Risk Venture Capital

Portfolio managers at CalPERS have been working through a big change somewhere in Sacramento, in one of those government office buildings with the unique institutional silence of places where important decisions are made without much fanfare. In March 2024, the California Public Employees’ Retirement System, which is the biggest public pension fund in the country and oversees over $500 billion for state employees, teachers, firefighters, and hospital staff, approved a plan to transfer an additional $30 billion into private markets. Steer clear of stocks. Steer clear of bonds. In the direction of private debt, private equity, and a growing number of opaque, illiquid investments that were previously thought to be too foreign for public retirement funds. The logic was fairly simple, in the same way that financial reasoning usually seems simple until something goes wrong: CalPERS calculated that by staying away from private equity, it might have lost out on returns of up to $18 billion over the preceding ten years. That’s a significant amount of retirement security.

This represents a wider change that is not exclusive to California. The proportion of so-called alternative assets in U.S. public pension portfolios more than doubled between 2001 and 2021, rising from 14% to 39% of their risky investments. Five years prior, only 30% of total assets in US state pension funds were allocated to alternatives; by 2023, that number had risen to 40%. Private equity saw the largest increases, rising from roughly 9% to almost 15% of total assets. Even though venture capital is smaller, fund managers are becoming more interested in it because they need returns that traditional markets haven’t been able to consistently provide. This is where things get complicated, and anyone who thought their pension was in a reasonably safe place might feel a little uneasy.

It’s important to comprehend the research on why this occurred. According to a July 2025 Stanford GSB study conducted by finance professor Juliane Begenau and her colleagues, beliefs—rather than desperate underfunding—were the main factor driving managers to take risks. The views of investment consultants in particular. Since 2001, the advisory firms that oversee nearly all public pension portfolios in the United States have been steadily raising their expectations for returns from alternative investments. The researchers discovered that this “consultant effect” was significant enough to explain the whole rise in alternative investment allocations across all pension plans in the country. You get a herd when an advisor thinks private equity will do better, their clients trust the advisor, those clients speak to nearby pension managers at conferences, and those managers change their own allocations. a geographically concentrated, remarkably well-coordinated herd of very large institutional investors, all of whom are moving money at roughly the same time and in roughly the same direction. That’s not always incorrect. However, it’s important to understand that it’s the mechanism.

The argument for alternatives is not without merit. According to CalPERS, in the ten years prior to 2023, private equity produced returns of almost 12 percent annually, while public equities produced returns of 8.9 percent and fixed income produced a rather dismal 2.4 percent. After the 2008 financial crisis, bonds were practically worthless as a source of returns due to ten years of nearly zero interest rates, and pension managers’ perspectives on risk were permanently altered by the memory of how vulnerable equity-heavy portfolios were to the 2007–2009 market collapse. Alternative assets offered a different kind of return: the potential for the kind of premium that comes from investing in things that are more difficult to enter and exit, as well as returns that didn’t neatly correlate with fluctuations in the public market.

The tension that isn’t always highlighted in the investment committee presentations is the “harder to get out of” part. Venture capital and private equity are inherently illiquid. Compared to public markets, the performance gap between top-quartile and bottom-quartile venture capital funds is significantly larger, investments take years to develop, and exits are unpredictable. Hedge funds are not the same as pension funds. It has quantifiable, specific liabilities, such as checks that must be sent to retired employees on predetermined dates each month for decades. It takes an exceptional level of confidence that the fund’s liquidity management is strong enough to withstand a prolonged period of poor performance in the alternatives book to invest significant capital in assets that are difficult to sell quickly when cash is needed. Certain funds have the necessary assurance. Others might be making decisions based on presumptions that haven’t been put to the test in the face of a persistent decline in private market valuations.

Pension crises will “start to bite” over the next ten years in super-aging societies, according to the World Economic Forum’s Global Risks Report for 2025. It specifically noted that some institutional funds may try to increase returns by allocating larger proportions of assets to riskier investments, such as private credit and cryptocurrency assets. With some accuracy, the report also stated that “these riskier investments will not always pay off.” That sentence in particular is working very hard. It describes a dynamic that is already actively taking place using their retirement savings and is hidden in a risk report that the majority of pension recipients will never read.

The math that made the investment strategy seem necessary is the underlying structural issue, not the strategy itself. As of 2016, the 20 biggest OECD economies were estimated to have a $78 trillion shortfall in their pension obligations; this number has not significantly changed since. At that time, private pensions in the United States were funded at about 82% of their liabilities, leaving a $3 trillion shortfall. The pension sector in the UK as a whole had a £736 billion funding deficit at 67.7%. These are not minor differences that call for slight corrections. Decades of insufficient contributions, overly optimistic return assumptions, and the fundamental demographic fact that people are living longer than the original models predicted all contributed to these structural deficiencies. In part, the move toward riskier assets is an effort to surpass the required return rate, which would otherwise necessitate the painful admission of how underfunded many of these systems truly are.

As all of this develops, it seems as though the decision-makers in charge of these funds are sincerely attempting to address a genuine issue under challenging circumstances, and the retirees whose money is involved have very little visibility into the process. It is reasonable for a municipal employee in Ohio or a teacher in California to believe that their pension fund is handling their deferred wages responsibly. The quality of the consultant advising the fund, the board’s judgment, the portfolio’s liquidity position, and the patience of markets that have recently shown they are not always patient all play a significant role in determining whether venture capital, private credit, or complex alternatives are considered prudent. The consultants are upbeat. Alternatives will perform better, according to the models. This is also what the nearby pension funds are doing. The question of whether that represents wisdom or the specific type of collective confidence that precedes a crisis is likely to remain unanswered until the next protracted market decline occurs and we observe how the illiquid half of these portfolios responds to pressure.