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

California's San Bernardino County Employees' RetirementAssociation, which oversees $6.1 billion, is poised to recommendinvesting in a fund from Tennenbaum Capital Partners LLC thatexclusively focuses on lending to smaller companies. The New YorkState Common Retirement Fund, with about $150.3 billion of assets,committed money to funds from Brightwood Capital Advisors LLC andMonroe Capital Partners LP this year.

Fund managers that oversee retirees' health and pension benefitsare seeking the debt of smaller junk-rated borrowers, pushed towardriskier investments as the Federal Reserve pledges to hold interestrates near zero through 2014. Borrowers with $500 million or lessin annual revenue are paying disproportionately higher yields asU.S. banks reduce commercial and industrial lending by 12 percentfrom the 2008 peak.