Global Pension Funds Face Growing Challenges From Aging Populations

Pension funds around the world are confronting a significant challenge as demographic changes put increasing strain on their financial sustainability. Longer life expectancies combined with declining birth rates mean that retirement systems must support beneficiaries for extended periods while fewer workers contribute to these funds. This demographic shift raises serious concerns about the capacity of pension schemes to provide adequate income for future retirees.

Pension systems generally fall into two main categories. Defined-benefit plans guarantee retirees a fixed income based on factors like salary and years of service, while defined-contribution plans depend on the amount saved and investment performance to determine payouts. Both structures face unique difficulties amid an aging population. Defined-benefit plans accumulate larger liabilities as retirees live longer, increasing the financial burden on the system. For defined-contribution plans, retirees risk outliving their accumulated savings, intensifying the pressure on investment returns to meet retirement needs.

Sebastien Betermier, executive director at the International Centre for Pension Management, described the situation as "huge and increasingly pronounced," highlighting cases where pension members have been retired for nearly fifty years and some have reached ages of 107 or 108. He emphasized the financial implications for younger generations tasked with funding these extended retirements, calling it a "ticking time bomb." This demographic trend means pension funds must cover more years of benefits, creating additional liabilities that will impact society broadly.

These challenges are detailed in the 2026 Marsh CFA Institute Global Pension Index (MCGPI) report, released recently. It shows that out of 55 pension systems analyzed, 43 have fertility rates below the replacement level of 2.1 children per woman, with 23 systems falling below 1.5. Meanwhile, life expectancy at age 65 in developed regions has increased by nearly 51% since 1950, now averaging approximately 20 more years of life. This combination results in longer retirement periods and a shrinking base of working contributors supporting retirees.

The MCGPI report warns that many pension systems are not currently secure under these conditions. Pay-as-you-go pension schemes, which rely on current workers' contributions to pay existing retirees, are particularly vulnerable as the workforce diminishes. In the United States, for example, the Old-Age and Survivors Insurance Trust Fund is projected to deplete its reserves by late 2032, threatening the financial backing for millions of beneficiaries.

Even fully funded pension plans, which invest contributions to finance future benefits, are facing pressures. As members retire and withdraw benefits, some funds may pay out more than they receive in new contributions. This situation forces pension managers to reconsider investment strategies and liquidity management to meet obligations, as highlighted by the MCGPI report.

In response, many pension funds are adjusting their investment approaches. With benefit payouts exceeding contributions, funds increasingly depend on returns from accumulated assets. Some are shifting toward higher-risk investments such as private equity, infrastructure projects, and private credit to boost returns. This risk tolerance varies by region but is generally rising due to the need for higher yields to cover growing liabilities.

Jean-Pierre Aubry, associate director at the Center for Retirement Research at Boston College, notes that pension funds across markets are taking on more risk amid rising costs associated with demographic changes. In the U.S., public pension funds hold a relatively small portion of assets in bonds—around 20%—and allocate much more to equities and private assets, exposing them to greater investment risk compared to European and Canadian counterparts.

However, not all pension fund leaders view aging demographics as justification for significantly riskier bets. David Elias, CEO of the Australian pension fund Hostplus, points out that investment decisions are influenced by multiple factors beyond demographics. He advocates for maintaining diversified portfolios across asset classes, regions, and sectors, ensuring returns justify the risks taken. Elias also suggests that governments have tools to mitigate aging population pressures, including immigration policies and technological innovation, which may also create new investment opportunities.

He expressed confidence in governments’ ability to adapt creatively to these demographic challenges, while acknowledging that addressing the issue will be essential in the coming years. As pension funds navigate these demographic shifts, balancing risk and sustainability remains a critical challenge for retirement security worldwide.