Pension funds retreat from bonds, BIS paper finds

Pension funds around the world have been moving money out of government and corporate bonds and into mutual funds and alternative assets, according to a Bank for International Settlements paper published Wednesday, a shift the authors link to falling local bond yields.

That matters because pension funds are among the biggest long-term investors in debt markets. When they buy less sovereign and corporate debt, the mix of investors financing governments and companies changes too, with possible consequences for borrowing costs, market structure and financial stability.

“The pensions sector is an important investor group in global financial markets and a key holder of government and corporate debt,” the paper’s abstract says.

The paper, titled “Global pension asset allocations and debt markets,” was written by Ding Ding of MIT, Xiang Fang of the University of Hong Kong, Bryan Hardy of the BIS and Karen Lewis of the University of Pennsylvania, NBER and CEPR. Using OECD Global Pension Statistics covering 87 countries, along with detailed U.S. datasets, the authors find that pension funds globally have reduced fixed-income holdings over time while increasing their holdings of mutual fund shares and alternative investments.

The pattern shows up across the United States, advanced European economies and emerging market economies, the paper says, suggesting the change is broad rather than confined to one region or pension model.

In the United States, the shift has been especially stark. Pension funds’ fixed-income holdings fell from about 40% in the early 1980s to around 10% in 2023, according to the paper. Over the same period, holdings of mutual fund shares rose from negligible levels to close to 30%. The U.S. evidence also suggests the decline in fixed-income exposure reflects reduced holdings of both public debt and private debt, not just government bonds.

The authors connect that reallocation to the long era of low interest rates, while stopping short of claiming they have proved cause and effect. They find that falling local-currency government bond yields are associated with lower bond shares in pension portfolios and higher shares of mutual funds and foreign assets. “We hypothesise that a global decline in interest rates is one potential driver of this change,” the abstract says.

That distinction matters. The paper documents a strong relationship between lower yields and pension reallocations, but frames rates as a potential driver rather than settled causation.

The broader concern is what happens when a traditionally patient class of bond investors steps back. As the paper puts it, “the retreat of pensions from debt shifts the investor base for sovereign and corporate bonds towards other investors such as investment funds.” Those investors, it adds, “offer daily liquidity and are more exposed to investor runs and procyclical flows.”

In plain terms, if more debt ends up in open-ended funds that let investors redeem cash every day, bond markets may become more vulnerable to rapid outflows during periods of stress. The paper briefly points to the 2022 U.K. liability-driven investment crisis as an example of how pension-related liquidity strains can amplify turmoil in bond markets.

The scale of the shift helps explain why regulators and investors care. As of late 2025, U.S. pension funds managed about $29.6 trillion, roughly 96% of U.S. gross domestic product, the paper says. Euro-area pension funds managed about 3.6 trillion euros, about 24% of euro-area GDP.

The paper also includes a caveat on its alternative-assets data. Its private-asset coverage relies in part on Preqin, a data provider whose figures use self-reports and imputations and may not capture all holdings. More broadly, while the paper presents evidence consistent with lower rates pushing pensions away from bonds, it does not claim to have definitively proved that channel.