U.S. pension-plan managers are pouring cash into debt from the smallest speculative-grade borrowers, seeking to meet targeted 8 percent returns at a time when average yields are at about record lows.

California's San Bernardino County Employees' Retirement Association, which oversees $6.1 billion, is poised to recommend investing in a fund from Tennenbaum Capital Partners LLC that exclusively focuses on lending to smaller companies. The New York State Common Retirement Fund, with about $150.3 billion of assets, committed money to funds from Brightwood Capital Advisors LLC and Monroe Capital Partners LP this year.

Fund managers that oversee retirees' health and pension benefits are seeking the debt of smaller junk-rated borrowers, pushed toward riskier investments as the Federal Reserve pledges to hold interest rates near zero through 2014. Borrowers with $500 million or less in annual revenue are paying disproportionately higher yields as U.S. banks reduce commercial and industrial lending by 12 percent from the 2008 peak.