Well you need to ask why don't pension funds hire more talented people ?

It's because those people are expensive and that means having to charge a higher management fee.

And what do consumers tend to base investment choices on ? - management fees. High management fees mean that consumers won't pick that fund.

Consumers can't tell how sophisticated their pension fund managers are so they'll just pick a cheap upfront cost which (potentially) because of poor management will cost them a lot more in the long term.

Even if you paid more, the incentives are wrong. Managers are told (often by state legislatures) to go out and hit unrealistic return targets, because to lower the targets would mean the states have to fund the pension more. If they hit the target, they keep their job. If they miss their target, they get fired. What would you do?

This is also why state pensions like to jam money into alternative investments like hedge funds and venture. They're chasing yield.

This sounds like a very difficult situation! I didn't realize it was this complicated; I always wondered why pension fund managers were so gullible.

The pension fund managers are stuck between a rock and a hard place. States underfund pensions while state employees keep demanding ever larger retirement benefits. So as a result they have to seek insane returns on their portfolios.

Yup. And eventually it ends in tears, because they fail to hit their ridiculous return targets and the pension ends up massively underfunded. But of course at that point, the politicians are either gone, or just blame the fund for failing to hit targets.