With global trade wars, environmental, social, and governance pushback and artificial intelligence advances, 2025 was a roller-coaster year for institutional investors.
Unfortunately, 2026 is shaping up to be another year marked by high uncertainty. Here are three priorities for pension leaders to keep in mind as they steer their organizations through turbulent waters.
Managing uncertainty
The current level of economic and geopolitical uncertainty will likely persist in 2026, as evidenced by the recent developments with Greenland.
Managing this uncertainty is the No. 1 priority for pension investors. Their portfolios need to be agile and resilient to withstand shocks to the world economic order.
This means revisiting the funds’ decision-making processes that aren’t designed to handle regime shifts. Scenario analysis is a promising tool to model complex scenarios and simulate their impact on the portfolio. The main weakness is that scenarios are often subjective and ad hoc — and if investors focus too much on negative scenarios or design overly conservative strategies, they lose their ability to generate returns and stay afloat over the long-term.
Becoming more agile also requires revisiting the funds’ governance processes. Most institutional investors use the strategic asset allocation framework. This often sets up rigid decision-making processes where asset allocation targets are set by the board and reviewed annually, leaving management teams with little bandwidth to maneuver around these targets. Becoming more nimble means either increasing asset allocation bands, making boards more responsive or delegating the asset allocation decisions to the management teams. The need for agility has led to ongoing discussions about the ‘total portfolio approach’ as an alternative to SAA.
Building government partnerships
Governments across developed economies face a troubling fiscal future as their populations age without corresponding replacement rates while needing billions of dollars to fund green and digital transitions, renew infrastructure and overhaul defense capabilities.
Recently, the Canadian federal government has called on domestic pension funds to be “patriotic” and finance such projects. These calls to action are misguided because they ignore the pension funds’ fiduciary responsibility to act solely in the best interest of the plan beneficiaries. However, since governments have the power to change laws and impose mandates and restrictions on pension investments, pension funds need to proactively collaborate with governments and find ways to invest more domestically — on commercial terms — and mitigate the risk of adverse legislative action. To use Canadian Prime Minister Mark Carney’s analogy at Davos’ World Economic Forum, if pension funds aren’t at the table, they’re on the menu.
Building partnerships with governments can take several forms, each of which comes with its own risk-return profile. One strategy is to convince governments to either sell or lease existing infrastructure assets such as ports, airports and utility companies, which is something Australia did successfully. Another strategy is to develop new infrastructure assets such as centralized district energy systems, battery energy storage, data centres and green building retrofits. Although new infrastructure projects tend to be riskier, their development can be done with the help of public-sector investment organizations such as the Canada Infrastructure Bank, the Building Ontario Fund and the Canada Growth Fund, which all have the ability to absorb part of the risk and invest on concessionary terms.
Read: Bank of Canada to stay course on policy in 2026, unless trade shock risk increases: expert
Revisiting private investments
Over the past two decades, private investments have taken an increasingly large space inside pension fund portfolios, reaching 25 per cent to 30 per cent of assets under management. However, private markets are currently undergoing their own structural shifts. Large asset managers are rapidly gaining market share and turning into diversified, multi-asset platforms accessible to retail investors. The 2025 U.S. executive order enabling access to alternative assets for 401(k) plans may trigger a large wave of retail investor participation in private funds.
If this trend materializes, pension funds will possibly invest in a riskier environment with private-market funds alongside an investor base that is less financially sophisticated, less coordinated and more pro-cyclical. Because private investments are opaque and illiquid, private market funds with a large retail investor base will be increasingly exposed to the risk of investor runs. Will pension funds want to stay on in a diluted capacity as limited partners in large private-market funds, or should they find niche private markets where they continue to have an edge as direct or co-investors?
2026 comes with difficult challenges. But pension organizations have the opportunity to make our pension system more resilient and agile and better equipped to meet the needs of retirees.
Read: Canadian institutional investors with U.S. investments facing impact from currency volatility