The pension funds’ continued plans to increase their exposure and allocations come as parts of the private credit market, particularly software-focused lending, are facing increased scrutiny.
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Pension systems around the world are facing a demographic crisis, as longer lifespans and lower birth rates threaten to strain retirement finances, raising questions about their ability to maintain payments to future generations.
Pension plans generally fall into two categories. One is a defined benefit plan, which promises retirees a set income, and the other is a defined contribution plan, where payments depend on accumulated savings and investment income.
Aging poses different challenges to these two systems. Defined benefit plans face increased liability as retirees live longer, while defined contribution participants risk outliving their savings, putting significant pressure on a fund’s investment performance.
Sébastien Betelmier, executive director of the International Center for Pension Management, said the problem was “huge and has become more pronounced over time,” noting that some pension funds have members who have been retired for nearly half a century and are 107 or 108 years old.
“The longer the lifespan, the more years the pension fund has to cover, which immediately becomes an additional liability,” he said. “Think about the cost it actually imposes on the next generation… It’s a ticking time bomb,” Betelmier told CNBC.
The scale of the challenge is revealed in the 2026 Marsh CFA Institute Global Pension Index (MCGPI) report, released last Tuesday. Of the 55 pension schemes included in the index, 43 have fertility rates below the replacement level of 2.1 children per woman, and 23 have fertility rates below 1.5.
Meanwhile, life expectancy at age 65 in developed regions has increased by 50.9% since 1950, or about 20 more years, meaning retirement benefits have to last much longer. The number of potential workers to support the elderly is also expected to decrease significantly.
The MCGPI report states: “As the ratio of workers to retirees continues to decline, both future pension and aged care financing become more important.” “Very few systems in operation today are secure.”
This problem is particularly acute for pay-as-you-go pension systems, where contributions from current workers are primarily used to pay benefits to current retirees, leaving retirees particularly vulnerable to a decline in the workforce.
This pressure is already evident in the United States, where the Old Age and Survivor Insurance Trust Fund, which funds retirement and survivor benefits for tens of millions of Americans, is projected to run out of reserves in the fourth quarter of 2032, according to the latest trustee report.
Everyone is shifting a little more risk wherever they can. With this demographic shift, costs are rising.
Jean Pierre Aubri
Boston University Retirement Research Center
Fully funded pension plans, where contributions from workers and employers are invested to fund future retirement, are no different.
As members retire and begin drawing down their benefits, some funds may end up paying out more than the new contributions they receive, forcing them to reconsider their investment strategies and liquidity needs, MCGPI warned.
“Future benefit outflows will exceed the level of contributions and contributions…This fiscal burden will inevitably increase in the future,” the report emphasizes.
Rethink risk
The population crunch is reshaping how pension funds invest, with some taking on greater risk to generate the returns needed to meet growing retirement obligations.
Many mature funds already pay out more in benefits than they receive in contributions, forcing them to rely increasingly on investment returns and accumulated assets.
According to the Australian Prudential Regulation Authority’s 2025 report, around a third of pension funds in Australia have negative natural cash flows from assets over a three-year period, meaning benefit payments exceed contributions.
Industry insiders say pressure to generate higher returns has led some funds to lean into riskier and more complex investments such as private equity, infrastructure and private credit.
“You can try to get a higher return on your investment, but to do that you need to take a higher level of risk,” Betermier said.
Jean-Pierre Aubry, associate director of state and local research at Boston University’s Center for Retirement Research, said pension funds are increasingly shifting to riskier investments, although the extent varies widely by market.
“I think everyone is trying to shift risk a little bit more from where they can. With this demographic shift, costs are going up,” Aubrey said.
He noted that U.S. state and local pension funds hold only about 20% of their assets in bonds, with much of the rest invested in stocks and personal assets.
Such an allocation leaves U.S. public pension funds significantly more exposed to investment risk than European or Canadian public pension funds, he said.
Not all pension managers see aging as a reason to take bigger bets.
David Elias, CEO of Australian pension fund HostPlus, said demographic changes were just one of many factors shaping investment decisions.
He emphasized the importance of maintaining a diversified portfolio across asset classes, regions and industries, ensuring that potential returns adequately compensate for associated risks.
Elias also said that while governments can find ways to alleviate the pressures of an aging population, such as through immigration policies and technological advances, demographic changes themselves could create new investment opportunities.
“I don’t underestimate the government being incredibly creative in terms of dealing with these kinds of issues,” he said. “You know, they’re going to have to deal with it, there’s no doubt about that.”
