Nicolas, can we bury the 60/40 as a reference point for institutional asset allocation? Not only won't it work, no one is there any more. Your numbers showing higher expected returns for the typical public pension portfolio than for a 60/40 means they are running more risk. Looks like 70/30 or 75/25 to me. Big endowments are often running even more risk.

Also, while pension systems are unsustainable, their failure mode, and the right defensive asset allocation, is very much in question. Cutting benefits and raising retirement ages are deflationary steps. They will drive rates down even more, further depressing expected returns. Bonds win. A vicious cycle. But the other policy path is just printing the money to pay benefits. (The Feds will have to bail out the states at some point). This will lead to inflation, higher nominal returns but losses in real terms. Bonds lose, perhaps big. TIPS are the only asset to do well in both regimes.