In an increasingly volatile and uncertain financial world where the investment landscape has been exposed to unpredictable shocks, pension funds have been among the most affected by equity market declines and this is expected to further heighten the desire to diversify their asset portfolios.
Stock market indices across major economies have fallen in the wake of the introduction of the United States administration’s tariff policy.While tariff amounts have been rolled back in some cases, or put on hold, with countries like China also levelling their own tariff’s on the US in response, the level of uncertainty in global markets remains high.
With pension funds and other large institutional investors having broad exposure to the movements in US stock markets in particular, there have already been reports in the media of moves being taken to reduce portfolio weighting to the areas of global markets where the tariff-induced equity volatility has been highest.
But a report from the bipartisan non-profit retirement system focused Equable Institute lays bare the effects US pension plans have felt from the recent market volatility.
The Equable Institute estimates that US state and local pension funds have lost as much as $249 billion through public equity market volatility in 2025.
A stunning $169 billion is estimated to have been lost by these state and local pension funds in just the four trading days during the April 3-8 period following the Trump administration’s announcement of global tariffs, the Institute explained.
Looking only at the top 25 pension investment funds, the Equable Institute’s analysis shows that $140.7 billion had been lost through April 11th, of which $67 billion has been lost since April 2nd.
In the main these are US state public retirement systems, teachers pension funds and other state investment boards, many of which have allocations to alternatives including in some cases to the insurance-linked securities (ILS) asset class.
The Equable Institute’s estimates are based on the latest public portfolio disclosures of these large pension fund investment entities, so may not account for any trading that occurred in advance of the tariff announcements.
Explaining how the US tariff policy has affected large pension funds, the Institute notes the most immediate as being the public equity losses it has estimated, but also highlights that private capital and fixed income losses are also anticipated.
“We have not yet estimated how the losses to other asset classes have affected pension funds, but as of fiscal year
2024, state and local pension funds had 58% of their assets in non-public equities — e.g. fixed income, private capital, real estate, commodities, etc. Therefore, we know that the losses public pension funds have experienced are deeper than just the initial public equity declines,” The Institute explained.
The long-term effects of the economic and financial market volatility on real assets and real estate investment trusts are harder to predict, “However, in the near-term, the value of REITs have on average declined, as reflected in a common benchmark index of all U.S. REITs, called the FTSE Nareit All Equity REITs Index, which has declined 7.4% since April 2,” the Equitable Institute said.
Should the tariffs lead to economic recession, or the volatility be prolonged, the state and local pension funds could experience changes in cash flow in the coming years, beyond the portfolio losses, the Institute also said.
The Equable Institute concluded, “State and local pension funds have been struggling with pension debt paralysis over the past several years, with some reasonably positive incremental improvements in funded status but still a persistently high level of unfunded liabilities. Coming into 2025, state and local pension funds were fragile, with just an average 80.2% funded ratio and $1.37 trillion in pension debt. The financial market shock of the last few days is exactly the kind of negative scenario that fragile pension funds should be concerned about. It will also be very important to monitor individual pension funds that were already distressed in some capacity coming into this year.”
Of course, equity market losses are mark-to-market in nature until any positions are sold, but the quantum of the decline is meaningful and for many pension fund investment management teams the wild and volatile swings are likely to have been more concerning, when they have funding targets to meet.
Pension advisers are cautioning against any panicked moves, but also reiterating their advice to those with retirement pots to rethink overly large exposure to equity markets and to ensure diversification across retirement portfolios.
The same messaging is coming from pension consultants, who advise the pension funds and plans of the world on their asset allocations.
Knee-jerk reactions to the volatility are not advised, but portfolio reviews to ensure allocations meet risk tolerances and appetites are also underway for some pension funds we understand.
Already there are reports of some European pension investment funds rethinking their exposure to US equity markets, with some saying that the political risk at this time is likely to result in them reallocating to some degree.
Some European pensions have reduced their exposure to US stocks and also to the dollar, in the wake of the tariff induced market volatility, preferring to reposition sooner than later as they don’t currently see the situation stabilising enough to encourage them to leave allocations as they were.
Prioritising long-term savings and investment goals is seen as key, but so too is ensuring portfolio balance and diversification, with liquid alternatives one area of growing focus, according to some of our contacts in the pensions community around the world.
As with every major period of financial market volatility, there is an expectation that we will see a rekindling of appetite for diversifying asset classes, which could result in more interest being show in catastrophe bonds and other reinsurance-linked assets.
We’ve seen this before, after the global financial crisis of 2008, during and after COVID, and more recently in the wake of the SVB bank crisis.
Volatility tends to heighten awareness of the benefits of diversification and once again during this most recent period the cat bond and ILS asset class has remained stable, demonstrated the benefits of noncorrelation and continued to deliver returns to investors that are already allocated.
Diversification is seen as the best protection against uncertainty and volatility and major US pension funds have been quick to highlight their diversification across asset classes, while some have pointed to the returns being generated in their liquid alternatives buckets through the recent market fluctuations.
However, alternatives remain a relatively small component of overall pension fund allocations and while there has also been some push-back on hedge fund fees in recent years, a heightening of awareness for the benefits of relatively uncorrelated asset classes could ultimately help to promote diversifiers like ILS.
While knee-jerk reactions to the tariff-induced market volatility were not advised, the changing view of political risk is driving large institutional investors to revisit planning and portfolios, which provided an opportunity for catastrophe bonds and ILS to become part of the conversation.
Now may not be the time to make significant shifts in portfolio positioning, although as we said some European pensions and institutional investors have already highlighted a move away from US assets. But it is a time to refresh pension trustees’ memories about the benefits of adding relatively uncorrelated return streams to their portfolios, so we imagine the ILS manager community could benefit from increased levels of enquiries at this time.
Alternative assets have steadily grown as a share of pension fund assets in the last few decades, but many of those classes are proving to be correlated with the volatile market situation seen in recent weeks.
As a result, truly uncorrelated or lightly correlated asset classes are likely to benefit from increased attention at this time, which could drive more awareness of insurance-linked securities (ILS).
Also read:
– Cat bonds stable & resilient amid tariff financial market volatility: Fund managers.
– No cat bond “dash for cash” seen as investors navigate financial market turmoil.
– Investor appetite for cat bonds grows amid market volatility: Guatteri, SRILIAC.
– Cat bonds structurally sound and increasingly attractive to investors: JANA.
