Under Aon's Worst Case, Oregon's Portfolio Becomes 77% Illiquid

11 minutes ago

3 min read

What's New

Aon Investments modeled the Oregon Public Employees Retirement Fund's liquidity profile under three economic scenarios for the council's asset allocation decision, in analysis published in the council's meeting book. Under the Dark Skies scenario, a deep recession followed by prolonged stagnation, illiquid exposure rises from 53% to 77% for the actual allocation and from 49% to 70% for the recommended Portfolio D. Aon's conclusion is that liquidity remains sufficient in all three scenarios. The number worth sitting with is what sufficient looks like at 77%.

Why It Matters

The denominator effect is usually described rather than measured. Aon measures it, and the model is conservative in the directions that matter, assuming commitments continue and that lock-ups lengthen as conditions worsen. The finding cuts both ways for allocators. A plan with positive contributions can carry far more illiquidity than intuition suggests. It also cannot do much else while carrying it, and the fund that emerges from a Dark Skies decade is three quarters private whether or not anyone chose that.

Big Picture Drivers

The starting point differs by portfolio: Current policy starts at 46% illiquid, the actual allocation at 53%, and Portfolio D at 49%, so a 3 point policy choice becomes a 7 point difference in the stress case.
Base case barely moves anything: Under markets performing in line with the study's assumptions, all three portfolios finish within a point of where they started.
Recession widens the spread: Illiquid exposure reaches 51% under current policy, 55% under Portfolio D, and 60% under the actual allocation as risk assets fall and private marks lag.
Dark Skies is where the gearing shows: A 24 point rise for the actual allocation against 18 points for current policy comes from starting 7 points higher, not from different assets.
Lock-ups stretch as conditions worsen: Aon assumes quasi-liquid assets lock up for one year normally, two years in a recession, and three years under Dark Skies, so hedge funds and open-end real assets stop counting as an escape valve exactly when needed.
Commitments keep going out: The model continues private commitments in every scenario, trimming them only 15% when allocations run 10% above target and 30% when they run 20% above.

By The Numbers

77% maximum illiquid exposure for the actual allocation under Dark Skies
70% maximum illiquid exposure for the recommended Portfolio D under the same scenario
64% maximum for current policy, 13 points below the actual book
60% illiquid exposure for the actual allocation in the milder recession case
3 years assumed lock-up for quasi-liquid assets under Dark Skies, three times the base case
$89.1 billion actuarial asset value excluding side accounts used as the model's starting point

Key Trends to Watch

The overweight is what converts a stress scenario into a structural one: Aon points to managing current overweights toward Portfolio D targets as the way to improve the profile, which makes the transition plan a liquidity decision rather than a rebalancing one.
Commitment trimming rules become the live control: The 15% and 30% haircuts are the only mechanism in the model that slows private deployment, and they trigger on allocation breaches rather than on judgment.
Contribution policy sets the ceiling: Aon is explicit that sponsors who raise contributions in downturns can hold more illiquid assets, which ties Oregon's private markets capacity to employer rate policy set outside the council.
Model conservatism has a stated limit: Aon notes that real outcomes could exceed the modeled ones if conditions run longer or harder, which is the caveat that matters most at 77%.

Memorable Quotes

"Liquidity remains sufficient across the modeled Base Case, Recession, and Dark Skies scenarios." Aon's headline conclusion, reached at illiquid exposures that would be unrecognizable as policy.
"A deep recession followed by a longer period of stagnant growth" The Dark Skies definition, built on prolonged supply chain disruption and bank failures rather than a single market shock.
"actual outcomes could be more severe if future conditions are more prolonged or challenging than those modeled" The qualifier attached directly to the 77% figure.
"Should actual allocations exceed targets by 20%, future commitments are trimmed 30%" The model keeps writing checks into a depression, and only slows down when the breach is already large.

The Wrap

Aon's answer is reassuring on the question it was asked. Oregon can pay pensions through a depression without forced selling, and that is the test most liquidity studies exist to run. It is much less reassuring on the question allocators actually care about, which is what the fund can do afterward. A plan that arrives at 77% illiquid has no rebalancing capacity, no opportunistic capital, and a decade of committed capital calls to honor at the bottom of a cycle. The difference between 64% and 77% comes almost entirely from the overweight the fund is carrying today. Closing it is the only lever available before the scenario arrives.