---
title: "Pension Funds Have a Demographics Problem, and Their Answer Is to Take More Risk"
description: "Retirees are living longer and fewer babies are being born, so funds are buying private credit and hoping the returns cover the gap"
author: "Nate Ledger"
published: 2026-10-25T23:19:12Z
modified: 2026-10-26T02:10:20Z
url: https://rews.cc/a/pension-funds-have-a-demographics-problem-and-their-answer-i-25f27e
language: en
tags: ["pensions", "demographics", "retirement", "investment", "economy", "business"]
publisher: "Rews (https://rews.cc)"
---

# Pension Funds Have a Demographics Problem, and Their Answer Is to Take More Risk

*Retirees are living longer and fewer babies are being born, so funds are buying private credit and hoping the returns cover the gap*

By Nate Ledger · October 25, 2026 · https://rews.cc/a/pension-funds-have-a-demographics-problem-and-their-answer-i-25f27e

## In brief

- Longer lives and falling birth rates are straining pension systems worldwide, experts told CNBC
- Of 55 systems in the 2026 Marsh CFA index, 43 have fertility below 2.1 and 23 below 1.5
- US OASI trust fund reserves are projected to run out in Q4 2032, after which income covers 78% of benefits
- About a third of Australian super funds had negative natural cash flows over three years, per a 2025 APRA report
- Some funds are adding riskier private assets; US state and local plans hold only about 20% in bonds

A pension is a simple idea with a hard number in the middle. You promise people money for the rest of their lives, and then you have to have that money. Nobody knows ahead of time how long “the rest of their lives” will be. That used to be a manageable unknown. More and more, it isn’t.

Pensions come in two broad types. Defined-benefit plans promise retirees a set income, so if retirees live longer, the plan owes more. Defined-contribution plans pay out whatever you saved plus whatever it earned, so if you live longer, you might run out. In one case the fund carries the longevity risk and in the other the retiree does. Either way somebody carries it, and either way it is getting bigger.

“The higher the longevity, the more years the pension funds have to cover, and so that immediately comes in as an additional liability,” Sebastien Betermier, executive director at the International Centre for Pension Management, [told CNBC’s Lee Ying Shan](https://cnbc.com/2026/10/26/pension-funds-ageing-crisis-risk-investment.html). He said some funds have members aged 107 or 108 who have been retired for nearly half a century. Picture the actuary who priced that person’s pension in the 1970s. A half-century retirement was probably not on the spreadsheet. “Think about the cost that it imposes actually on the next generation … it is a ticking time bomb,” Betermier said.

The best summary of the scale is the 2026 Marsh CFA Institute Global Pension Index, the [18th annual edition](https://www.mercer.com/about/newsroom/aging-populations-are-straining-retirement-systems-worldwide-2026-mcgpi/), released on Oct. 20. It used to be called the Mercer index, before Mercer folded into the Marsh brand. This year’s special topic is ageing. Of the 55 retirement systems it covers, 43 have fertility rates below the replacement level of 2.1 children per woman, and 23 are below 1.5. In more developed regions, life expectancy at 65 is up 50.9% since 1950, to about 20 more years. Run that backwards and a 65-year-old in 1950 could expect roughly 13 more years. Today it’s about 20. That’s seven extra years of checks per retiree, with fewer workers coming along behind to pay for them.

“Very few systems, as they currently operate, are secure,” the report says. The [index scores](https://rpc.cfainstitute.org/research/reports/2026/marsh-cfa-institute-global-pension-index-2026) back that up: more systems earn A grades for adequacy and integrity than for sustainability. A system can treat today’s retirees well and still be unable to keep it up for the next lot. The Netherlands ranked first with 85.8, and Australia got an A for the first time.

## Two ways to run out

Pay-as-you-go systems have the most obvious problem. Today’s workers pay today’s retirees, so the system is only as healthy as the ratio between the two groups, and that ratio is falling. The US is the example everyone uses. According to the [trustees’ latest report](https://www.ssa.gov/oact/trsum/), the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivor benefits to tens of millions of Americans, will exhaust its reserves in the fourth quarter of 2032. After that, incoming revenue would cover 78% of scheduled benefits. The [Committee for a Responsible Federal Budget](https://www.crfb.org/papers/analysis-2026-social-security-trustees-report) describes this as an automatic 22% cut, unless Congress acts. That’s six years from now.

Fully funded schemes, which invest contributions and pay benefits from the proceeds, seem safer. They are safer, up to a point. The trouble shows up when a fund matures. Members retire, stop paying in and start drawing out, and eventually the fund is paying more in benefits than it collects. “Future benefit outflows will exceed the level of contributions or premiums ... this financial strain will inevitably grow in the future,” the index warns. This isn’t hypothetical. In Australia, according to a 2025 Australian Prudential Regulation Authority report, about a third of superannuation funds had negative natural cash flows over a three-year period, meaning benefits paid out exceeded contributions coming in.

A fund with negative cash flow has three places to get money: its existing assets, its investment returns, or nowhere. Spending the assets is fine for a while. That leaves returns.

## Reaching

So the industry’s answer to a demographic problem is an investment answer. Some funds are moving into private equity, infrastructure and private credit to earn more. “You can try to earn higher returns on your investments, but that’s going to require taking on greater levels of risk,” Betermier said, which is about as plain as finance gets.

“I think everybody is shifting a little more risk where they can. The costs are going up with this demographic shift,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College. He said US state and local government pension funds keep only about 20% of their assets in bonds, with most of the rest in equities and private assets. That leaves them a lot more exposed to investment risk than funds in Europe or Canada.

I think the logic is worth stating openly, because it’s a little odd. The liability is a promise to pay out for decades, and it is growing for reasons nobody can invest away. The fund’s answer is to hold assets that are harder to sell and harder to value, in the hope that the extra return covers the gap. If it works, the gap closes. If it doesn’t, the loss goes to the same next generation Betermier is worried about, only bigger. All of this is happening while parts of private credit, especially lending to software companies, are under heightened scrutiny. It’s also happening while Australia’s corporate regulator is asking whether auditors properly checked the values of [unlisted superannuation assets](https://rews.cc/a/asic-says-ey-and-pwc-signed-off-on-80-billion-of-super-asset-d60f73). Illiquid assets come with their own trouble: when a fund with negative cash flow needs to pay benefits, it can’t sell them quickly.

Not everyone sees ageing as a reason to bet bigger. David Elias, chief executive of the Australian fund Hostplus, said demographics are just one of many factors in investment decisions. He said a portfolio should stay diversified across asset classes, regions and industries, and the expected returns should justify the risk. He also said governments have tools of their own, including immigration policy and technology, and that demographic change could create investment opportunities of its own.

“I don’t underestimate governments being incredibly creative in terms of dealing with these types of issues,” he said. “You know, but they’re going to have to address it, no doubt about that.”

The index has its own suggestions: set clear goals for pension systems, fund future obligations first, and make retirement ages and pension products more flexible. It notes that retirement at 60 or 65 fits poorly with longer, healthier lives. That’s the honest fix. It means people work longer or get less, and no fund manager can make either one sound like a return.