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The Role of Illiquid Investments in Pension Plans

Background and Purpose

Pension plans are increasingly interested in investing in illiquid, non-market securities. These kinds of investments purport to offer better risk/return profiles than conventional stocks and bonds. Even if they simply offer uncorrelated risks and returns, they can improve overall portfolio performance. However, the investment policy decision concerning illiquid securities cannot be made in isolation from the funding, benefit design, accounting implications, and potential liability reduction strategies (e.g. annuity purchases).

The purpose of this research is to help actuaries advise sponsors of all types of retirement saving plans on the implications of using illiquid investments.

Research Objective

The Society of Actuaries Research Institute is seeking researchers to explore the role of illiquid investments in pension plans. The following are examples of proposed topics that may be addressed:

  1. How risky are illiquid securities relative to stocks or bonds if the sponsor’s primary concern is with:
    1. walk-away funded status determined by reference to annuity prices or market-calibrated commuted values (e.g. for plans contemplating wind-up)?
    2. accounting funded status and expense determined by reference to high-quality corporate bond yields?
  2. If contributions to a traditional defined benefit pension plan are based on actuarial valuations that compare the value of assets to a going concern funding target determined using a best estimate of expected returns, how should the going concern discount rate be adjusted to reflect fluctuations in the cap rates used to value illiquid investments?
  3. What special design features, asset valuation techniques, and constraints on investment policy are required to reduce sponsor and plan member risk when illiquid securities are held by
    • a cash balance plan?
    • a capital accumulation plan such as a 401(k) plan?
    • a modern tontine or other risk-pooling arrangement?
    • other types of pension plans that call for significant transactions between plan members and the pension fund at key moments in their career (e.g. past service buybacks, annuitization or lump sum settlement at termination of employment, optional forms at retirement)?
    Does it matter whether these transactions occur at market-driven prices or prices that are fixed by plan terms?
  4. What is the role of liquidity in the pricing and expected return on non-market securities? Some have taken the view that the absence of daily fluctuations in price makes non-market securities such as direct real estate investments preferable to their more liquid cousins such as REITs. Others have argued that illiquidity detracts from value.
  5. Can pension plan sponsors overcome the hurdles discussed in this Conexus Institute thought piece?

Note that the list above is not meant to be exhaustive but merely examples of relevant topics that may be researched.

Deliverables may include:

  • current views on illiquid investment valuation and risk/return profiles gathered from academic research and/or structured interviews with specialized investment practitioners.
  • analysis of publicly available history of capitalization rates compared to bond yields, pension discount rates, and historical rates of return.
  • analysis of the range of asset valuation quality (level 1, 2 or 3) and liquidity for various types of illiquid investments, including real estate, infrastructure, private equity, and venture capital

The primary audience is actuaries who advise clients on their choice of retirement income plans and the interaction of funding policy, benefit policy and investment policy. The research will also be relevant to actuaries who are primarily responsible for valuation, accounting and investment of existing retirement income plans.

Proposal Requirements

To facilitate the evaluation of proposals, the following information should be submitted:

  1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
  2. An outline of the approach to be used (e.g. literature search, model, etc.), emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
  3. A description of the expected deliverables and any supporting data, tools or other resources to be used.
  4. Cost estimates for the research, including computer time, salaries, report preparation, material costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included. Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor.
    As a guide for developing project budgets, please review the Historical Project Cost Guide (see Appendix).
    Please note that as a policy, the SOA Research Institute generally does not provide funding to cover academic institution overhead expenses.
  5. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions. The SOA is interested in completing this project in a timely manner. Suggestions in the proposal for ensuring timely delivery, such as fee adjustments, are encouraged.
  6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

Selection Process

The SOA will appoint a Project Oversight Group (POG) to oversee the project. The POG is responsible for recommending to the Section Research Committee the proposal to be funded, if any. Input from other knowledgeable individuals also may be sought, but the Section Research Committee will make the final recommendation, subject to Society of Actuaries Research Institute (SOA) leadership approval. An SOA staff research actuary will provide staff actuarial support.

Questions

Any questions regarding this RFP should be directed to research@soa.org with the subject line “The Role of Illiquid Investments in Pension Plans.”

Notification of Intent to Submit Proposal

If you intend to submit a proposal, please email written notification by October 1, 2025 to research@soa.org with the subject line “The Role of Illiquid Investments in Pension Plans.”

Submission of Proposal

Please email your proposal to research@soa.org with the subject line “The Role of Illiquid Investments in Pension Plans”; proposals must be received no later than October 15, 2025. It is anticipated that all proposers will be informed of the status of their proposal by the end of November 2025.

Conditions

The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries Research Institute and the researcher.

The Society of Actuaries Research Institute reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available. The Society of Actuaries Research Institute also reserves the right to redirect the project as is deemed advisable.

The Society of Actuaries Research Institute plans to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).

The Society of Actuaries Research Institute may choose to seek public exposure or media attention for the research. By submitting a proposal, you agree to cooperate with the [Society of Actuaries/sponsoring entity] in publicizing or promoting the research and responding to media requests.

The Society of Actuaries may also choose to market and promote the research to members, candidates and other interested parties. You agree to perform promotional communication requested by the Society of Actuaries, which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.

Conflict of Interest

You agree to disclose any of your material business, financial and organizational interests and affiliations which are or may be construed to be reasonably related to the interest, activities and programs of the Society of Actuaries or the Society of Actuaries Research Institute.

Appendix

The cost ranges below are intended as a guide for budgeting project costs for proposals in response to SOA Research Institute Request for Proposals (RFP). Please note these figures span the 33rd to 66th percentiles for all projects as well as projects that involve a specific approach (lit review, survey, etc.). They are based on historical costs over several recent years. Expected costs for some RFPs may fall outside these ranges depending on the nature of the work and resources required for completion.

All Contracted Projects

This category includes all contracted projects that the Institute has undertaken within the last several years. The 33rd – 66th percentile project costs range is $25,000 – $50,000.

Literature Reviews

This category includes projects that involved only a literature review or the cost for the portion of a larger project that included a literature review. The 33rd – 66th percentile project costs range is $15,000 – $20,000.

Surveys

This category includes all projects that had a survey as their primary component. The 33rd-66th percentile project costs range is $28,000 – $55,000.