How High is the Bar? Pension Fund Benchmark Choices in Real Assets

Abstract This paper examines how defined benefit pension funds select and revise performance benchmarks for real assets, including private real estate, listed REITs, infrastructure, commodities, and natural resources. Using data from CEM Benchmarking, we document substantial heterogeneity in benchmark selection across pension funds and asset classes, particularly in less mature private markets. We show that benchmark selection often does not align with underlying portfolio risk. In private real estate, large U.S. pension funds predominantly allocate capital to higher-risk non-core investment strategies while benchmarking performance against lower-risk core real estate indices. Selected private real estate benchmarks also underperform transparent and investable public-market alternatives, implying lower performance hurdles. We further document a growing use of absolute benchmarks in private real asset markets. Benchmark revisions are common and associated with changes in strategic asset allocation. At the same time, benchmark changes coincide with declines in both portfolio and benchmark returns, leaving benchmark-adjusted performance largely unchanged. Overall, our findings suggest that benchmark selection in real asset markets is highly discretionary and often weakly connected to underlying portfolio risk, reducing transparency and complicating delegated performance evaluation.