Pension funds are taking their gains from their flourishing stock portfolios and putting them into bonds or private markets, The Wall Street Journal reported.

The S&P 500 gained 10 percent through the end of March, its best first-quarter performance since 2019, and interest rates are higher than they have been in decades. That is leading large retirement funds to rotate their positions, the Journal reported. Goldman Sachs analysts estimated that pensions will sell $325 billion in stocks this year, up from $191 billion in 2023.

“You don’t want to give away all of those hard-earned gains,” said Zorast Wadia, a principal and consulting actuary at Milliman, in an interview. “You don’t want to give it back if stocks fall.”

Pension funds for workers at companies and state and local governments together held about $9 trillion at the end of 2023, according to Federal Reserve data, and many have been trying for years to come up with enough money to cover promised future benefits.

As big companies have mostly switched new hires to 401(k)-style retirement options, they have built up pension savings over the past two decades. Last year, they reported having enough to cover their liabilities for the first time since the 2008-09 financial crisis, Milliman found. As a result, corporate pension managers are investing less aggressively, the Journal reported, with stocks making up less than one-quarter of investments.

State and local government pension plans, which mostly remain open to new workers and have around three-quarters of the money they need to cover future pension promises, keep around half of their investments in stocks and more than 15 percent in other risky assets such as private equity, according to median figures from Wilshire Trust Universe Comparison Service.

The board of the country’s largest pension plan, the California Public Employees’ Retirement System (Calpers) voted in March to reduce its target stock allocation to 37 percent from 42 percent, while increasing investment in private equity and private debt. The $494 billion fund had about 72 percent of assets needed to cover future pension promises as of June.

The $260 billion New York State Common Retirement Fund is almost fully funded, but officials still decided earlier this month to shift money into private equity, real estate and real assets after a change in state law increased the cap on private market investments. The fund is reducing its target stock allocation to 39 percent from 47 percent.

“The model projected very slightly higher return for very slightly lower risk” on the new asset mix, said its director of asset allocation Michael Lombardi, in an interview with the Journal.

Companies in the S&P 500 trade at around 24 times their past 12 months of earnings, above the five-year average of 22 times, according to FactSet. 

“When it’s a very expensive stock market, bad things can happen,” said Marcus Frampton, the investment chief of the $80 billion Alaska Permanent Fund Corp. (APFC), in an interview with the Journal. The APFC, which invests mineral revenue and other state money and has no benefit payment obligations, is in the process of reducing its stock portfolio from 36 percent of assets in fiscal year 2023 to 32 percent in fiscal year 2025, and it canceled a plan to lower bonds to 18 percent from 20 percent. Higher rates mean that the APFC can still expect enough income from bonds to meet its investment target, returning five percentage points more than the consumer-price index, said Frampton.

Corporate pension plans are also embracing higher rates as a chance to lower risk without sacrificing as much income.

Johnson & Johnson dropped the target stock allocation for its $34 billion pension fund to 58 percent in 2023 from 62 percent in 2022, and it planned to put the additional money into bonds. Aerospace and defense company RTX reported that public equity investment made up 19 percent of assets in 2023, down from 26 percent in 2022.

The move out of stocks bodes well for the long-term health of pension systems, said Timothy Braude, managing director and co-head of multi-asset solutions at Goldman Sachs, in an interview with the Journal.

“It is very easy to say you want to take risk down at moments when you have no ability to actually do so,” he said.