When Cash Flows Turn Negative: Liquidity-Driven Selling by Pension Funds

Pension funds are long-horizon investors with predictable liability structures. As such, they are often perceived as investors who can provide liquidity and stabilize markets. However, pension funds increasingly face negative operating cash flows as benefit payments exceed contributions. Using aggregate data on U.S. public pension funds combined with granular holdings obtained through public records requests, we document three findings that challenge the conventional view of pension funds as stabilizing investors. First, pension funds with more negative cash flows do not adjust their target asset allocations and maintain low allocations to safe and liquid assets. Second, because of these limited safe asset buffers, pension funds meet cash flow shocks primarily by selling equities, absorbing $0.67 per dollar of shock through equity sales. At the security level, pension funds sell across equities rather than following a safe and liquid-assets-first approach. Third, pension funds sell equities even when equity returns are negative, indicating that these trades reflect liquidity needs rather than portfolio rebalancing. Together, these findings show that pension funds have become regular sellers in equity markets rather than contrarian, stabilizing investors.