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Do Pensions Own Alternative Investments? How Valuation Risk Affects Pension Stability
State and local pension funds allocated 32.2% of their total assets to alternative investments in 2025. That equates to $1.9 trillion of alternative investment exposure out of the total $5.9 trillion in pension fund assets.
On an individual basis, most states have between 20%-40% of their collective pension fund assets in alternatives. Some have greater exposure, and some have less, but what they all have in common is valuation risk — the risk that those assets aren’t worth as much as pension funds think.
Equable Insights
All figures as of 2025.
- Pension funds are heavily allocated to alternative investments: Nearly one-third ($1.9 trillion) of state and local pension plan assets are invested in alternatives.
- Alternative investments defined: Alternatives include real estate, hedge funds, private equity, commodities, cash, and other less-defined asset classes outside of the main stock and bond categories.
- Alternatives come with valuation risk: Of the $1.9 trillion in alternatives, $1.6 trillion is in valuation-priced assets that are exposed to valuation risk.
What Are Alternative Investments?
Alternative investments are certain asset classes that are not equities (stocks) or fixed-income securities (bonds).
Per Equable’s State of Pensions 2026 report, we define alternatives to include real estate, hedge funds, private equity, commodities, cash, and other less-defined asset classes outside of the main stock and bond categories.
How Much Do Pension Funds Have Invested in Alternatives?
As of 2025, the total of these alternative investments held in state and local pension funds was $1.9 trillion.
Allocations to alternatives have increased by more than 10 times since 2001, as the graph below shows. Back then, the total was $180.4 billion, or 9.3% of assets. By 2025, the alternatives allocation increased to a total $1.9 trillion, or 32.2% of assets.
Private capital’s share of total assets grew from 3.5% of assets in 2001 to 14.1% in 2025, while hedge funds rose from just 0.3% to 4.4%. Real estate increased from 4.7% in 2001 to 8.6% in 2025. Commodities and other alts jumped from 0.9% of assets to 5.2%.
States by Share of Pension Assets in Alternatives
There is a wide variance in how much state and local pension funds have invested in alternatives. Most states have between 20% and 40% of their collective pension fund investments allocated to alternative asset classes.
However, a few states are more aggressive, and a handful are more conservative, as shown in the table below.
For example, Oregon, Maine, Indiana, Washington, Hawaii, and Wyoming each have greater than 50% of their assets invested in alternatives. On the conservative end, Alabama and Georgia invest 8.3% and 1.3%, respectively, in alternatives.
States by Total Assets Under Management & Share of Investments in Alternatives
This infographic shows states based on their assets under management and the percentage of those assets invested in private capital, real estate, hedge funds, and miscellaneous alts.
Five states (California, New York, Texas, Ohio, and Illinois) manage half of all public pension assets in the United States. So, the dollar allocations to alternative investments in these states are a major driver of national figures.
Together, these five states hold nearly $3 trillion assets and invest $973.8 billion (32.8%) of that in alternatives.
But the size of state pension fund assets is not related to their alternative investments. Some smaller states have over 50% of pension assets invested in alternatives. For example, Wyoming, with a relatively small $11.1 billion in assets has $5.8 billion (51.7%) invested in alternatives.
Which Pension Funds Have the Largest Allocations to Alternatives
Some pension funds have committed a particularly large share of their assets to alternative investments.
This list shows the 20 state and local pension funds that have the largest share of assets in alternatives.
What is Valuation Risk?
A majority of the assets we define as alternatives are also valuation-priced assets. For example, real estate, hedge funds, private equity, and some miscellaneous alternatives are known as valuation-priced assets because they are priced based on valuation models and not market prices.
The other ~$300 billion in alternative investments consists of market-priced assets like commodities and cash.
The total of valuation-priced assets held in public pension funds was $1.6 trillion, or 27.1% of total assets, in 2025. This is up from $163.8 billion, or 8.4%, in 2001.
We make this distinction because, in recent years, pension funds have taken on greater and greater levels of “valuation risk.” This is the risk to pension funds that the value of their assets as reported to them is inaccurate. In other words, because valuation-priced assets are, by definition, priced based on valuation models, their actual value may be either understated or overstated.
This is in contrast to “opportunity risk” (the risk that a specific use of capital doesn’t justify the risk-adjusted returns relative to other opportunities), “asset risk” (the risk of losing money on an investment), and “management risk” (the risk that trustees will inefficiently allocate capital).
How Valuation Risk Affects Pension Stability
If asset values are overstated today, then reported funding levels are also overstated. This in turn can lead to lower-than-appropriate contribution rates, which will result in larger unfunded liabilities in the future than if assets were more accurately priced.
Overstated pension asset values can also lead to other policy decisions that could influence future funded status, such as raising the value of benefits or having lower political priority for supplemental funding to pay down unfunded liabilities faster than planned.[1]
The significant lack of transparency in how pension funds invest in valuation-priced asset classes like private capital and real estate exacerbates concerns about valuation risk.
Notes
- Consider that general partners managing a private equity fund often value their portfolio companies using the valuation of a recent funding round, which may or may not reflect an overstated price agreed to by a small set of exuberant investors. This pricing approach can lead to an overstated valuation of a pension fund’s limited partner share in that private equity fund, which in turn can lead to reporting overvalued assets that translate to lower contribution rates than would be appropriate.
Frequently Asked Questions (FAQs)
Valuation risk is the risk that a pension fund’s assets could be inaccurate. Since valuation-priced assets are based on valuation models and not market prices, they could be either understated or overstated, which affects funding levels, contribution rates, unfunded liabilities, and other subsequent policy decisions.
As of 2025, public pensions have 27.1% of their assets invested in valuation-priced assets and 32.2% of assets invested in alternative assets.
Valuation risk is important for public pension stability because it has direct and indirect effects on policymaking. When pension asset values are overstated, it can increase reported pension funding levels, resulting in lower contribution rates and larger unfunded liabilities. It may also lead to policymakers increasing the value of benefits or paying down unfunded liabilities more slowly than if assets were valued accurately, all of which may influence future funded status.
