Companies are looking for alternative investment options for their pension plan funds—for example, high-quality private credit—as they look to diversify their holdings amid high funding levels.

Businesses in recent years have invested a greater proportion of their plans in fixed-income securities, which are considered safer bets than assets such as equities, commodities, private equity and real estate. S&P 1500 companies invested 51% of their plan funds in fixed income in 2021, up from 50% a year earlier and 42% a decade earlier, according to consulting firm Mercer LLC.

That, coupled with volatile equity markets, has resulted in lower investment returns. The 100 largest U.S. pension plans generated average returns of 8.3% in 2021, down from 14.6% in 2020 and 19.5% in 2019, advisory firm Willis Towers Watson PLC said. Fixed-income securities such as U.S. Treasury securities and investment-grade corporate bonds generally offer little yield.

Now, a small but growing number of companies are considering adding investment-grade private debt to their fixed-income portfolios, which offer something of a middle ground, pension advisers said. Others, however, are sticking to traditional fixed-income investments.

“As companies look to continue to earn the returns for their programs, they are looking to pull all levers they can,” said John Delaney, senior director and portfolio manager at Willis Towers Watson.

Investment-grade private credit instruments are bonds that companies and other entities issue to investors outside the public markets. They provide a higher yield than some other fixed-income securities but are generally less volatile than equities, Mr. Delaney said.

Motorola Solutions Inc. is one of the companies exploring this avenue. The Chicago-based communications-equipment provider plans to invest about $100 million in investment-grade private credit over the next two to three years, on top of the $50 million it has deployed since 2019, Chief Financial Officer Jason Winkler said. The company plans to include the private credit to help boost its returns and diversify its portfolio, Mr. Winkler said.

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