Your Pension Is Someone Else’s Investment Vehicle
The idea behind a pension is straightforward. You work. A portion of your earnings is set aside. That money
The idea behind a pension is straightforward. You work. A portion of your earnings is set aside. That money is invested over decades and returned to you in retirement as a reliable income. It is a deferred wage, not a gift. The deal is simple: labour now, security later.
Understanding how pension funds work in practice, as opposed to in theory, is considerably less straightforward.
Pension funds, particularly the large public ones covering teachers, nurses, police officers, and civil servants, have become some of the most significant pools of investable capital in the world. State and local pension funds in the United States alone hold more than five trillion dollars in assets. Globally, the figures run into the tens of trillions. This is not abstract wealth. It is the accumulated contributions of working people, held in trust, and deployed across financial markets in ways that most contributors will never see, question, or fully understand.
The asset management industry understands it very well.
From Promise to Portfolio
To understand how pension funds work today, it helps to start with what they replaced. For most of the twentieth century, the dominant pension model was the defined benefit plan. Under this arrangement, the employer guaranteed a specific retirement income based on salary and years of service. The investment risk sat with the employer. If the fund underperformed, the company had to make up the shortfall. The worker’s retirement was not contingent on market conditions.
Over the last four decades, this model has been systematically replaced. Defined contribution plans, including the 401(k) in the United States and the superannuation system in Australia, transfer investment decisions and their associated risks directly to the employee. Workers are given individual accounts, a menu of investment options, and the responsibility to manage their own financial futures. As documented by the US Social Security Administration, this shift exposed employees to longevity risk: the very real possibility of running out of money before dying.
The reasons employers preferred this transition were transparent. Defined contribution plans are cheaper to administer. Employer contributions become a fixed, predictable cost. And crucially, the liability disappears. The company no longer has to worry about what happens when markets fall.
The people who were supposed to benefit from pension security bore the consequence. The people who were supposed to guarantee it walked away from the obligation.
The Fees Inside the Machine
How pension funds work in the current environment is, in large part, a story about fees. For the funds that remain, specifically the public pension systems covering government workers, a different dynamic has taken hold. As bond yields fell through the 1990s and 2000s and traditional fixed income became insufficient to meet projected liabilities, fund managers were pushed toward higher-returning assets. Private equity. Hedge funds. Real estate. Infrastructure. Investments that carry higher risk and, critically, higher fees.
The Pew Charitable Trusts, tracking the investment costs of US public pension plans, found that from 2006 to 2019, fees as a share of total investments grew by roughly thirty per cent. By the end of that period, state funds were reporting management costs in excess of ten billion dollars annually. That is ten billion dollars leaving pension funds each year, money that will not be available to pay the retirements of the workers who contributed it.
A report examining twelve public pension plans with combined assets of nearly eight hundred billion dollars found that those funds paid an estimated thirty-five billion dollars in fees over five years. The same analysis noted that the top twenty-five hedge fund managers in the United States earned more in a single year than all kindergarten teachers in the country combined.
The assets being managed are not the asset managers’ assets. They belong to the workers. The fees, however, are the asset managers’ fees.
Who Controls the Capital
How pension funds work is increasingly determined by a small number of enormous asset management firms. The concentration of control over retirement savings is significant. BlackRock, the world’s largest asset manager, manages more than fourteen trillion dollars in assets as of 2025. By its own account, more than half of what it manages is retirement-related. The firm states that it helps approximately thirty-five million Americans invest for retirement — roughly a quarter of the country’s workforce, including around half of all public school teachers. Vanguard, its closest competitor, manages approximately twelve trillion dollars.
Together, BlackRock, Vanguard, and State Street, known collectively as the Big Three, hold substantial stakes in virtually every major publicly traded company in the United States. Their influence over corporate governance, executive pay, and strategic direction flows directly from the scale of the retirement savings they control. The voting rights attached to pension-backed shares are exercised not by the workers those savings belong to, but by the firms managing the funds.
This arrangement did not emerge by accident. As argued in a 2025 Jacobin analysis, asset managers from the 1970s onward actively lobbied state governments to liberalise the regulations governing public pension investment, opening those pools of capital to professionally managed financial products. Access to growing postwar retirement savings represented, in the words of that analysis, an enormous opportunity for profit and market power. The lobbying succeeded. The regulations changed. The money flowed.
The Risk Remains with the Worker
A 2025 study by Aviva Investors found that more than half of global pension funds now allocate at least ten per cent of their portfolios to private markets — a category that includes private equity, private credit, and other illiquid investments. At least a third had weightings of fifteen per cent or more. These are assets that can take years to generate returns, with unpredictable exit timelines and dispersed performance between the best and worst managers.
The gap between how pension funds work in theory and how they function in practice is most visible at the level of the individual contributor. The workers contributing to these funds generally have no say in those allocation decisions. In defined contribution systems, they bear the investment risk directly. In defined benefit systems that remain, professional managers make the calls and collect the fees regardless of outcome. There is no mechanism by which a public school teacher can vote against her pension fund’s allocation to a private equity fund that charges two per cent management fees and twenty per cent of profits.
The pension exists for the worker. The capital within it exists for the market.
What This Adds Up To
None of this is to say that pension fund investment in private markets is inherently improper, or that asset managers do not provide a real service. CalPERS, the largest public pension fund in the United States, reported a fourteen per cent return on its private equity portfolio in its most recent fiscal year. Returns exist. Value is sometimes generated.
But the structure of the system, covering who carries the risk, who earns the fees, who votes the shares, and who shapes the regulatory environment, consistently favours the financial industry over the worker. The retirement savings of nurses and teachers and civil servants have become the raw material from which private equity empires, hedge fund fortunes, and asset management dynasties are built.
How pension funds work, and who they ultimately serve, is a question most contributors are never encouraged to ask. The pension is yours. The leverage it creates belongs to someone else entirely.
Sources
- Pew Charitable Trusts. Transparency in Investment Disclosures Helps Promote Effective Public Pension Administration. October 2023.
- Dreier, Hannah, and contributors. Turning Retirement Against Workers. Jacobin. April 2025.
- Broadbent, John, Michael Palumbo, and Elizabeth Woodman. The Shift from Defined Benefit to Defined Contribution Pension Plans. Bank for International Settlements Working Paper.
- American Federation of Teachers / Infrastructure Insight. Bridging Public Pension Funds and Infrastructure Investing, citing AFT (2017) analysis of alternative investment fees.
