According to Towers Watson’s annual “Global Pension Assets Study,” global institutional pension fund assets in the 13 major markets grew by 9.5% during 2013 (compared with 6.9% in 2012) to reach a new high of almost $32 trillion. The growth is the continuation of a trend that started in 2009, say the study authors, when assets grew 18%. It is also in sharp contrast to a 22% decline during 2008, when assets fell to around $20 trillion. Global pension fund assets have now grown at an average of over 6.7% annually since 2003.
The study reveals that the growth in assets helped to strengthen pension fund balance sheets globally during 2013, with 10-year figures showing the U.S. grew its pension assets by 27% to reach 113%. The ratio of global assets to global gross domestic product (GDP) is at its highest level since the research began. According to the study, pension assets now amount to around 83% of global GDP, a large rise from the 76% recorded in 2012 and substantially higher than the 57% recorded in 2008.
“During 2013, equities enjoyed their best calendar year of risk-adjusted returns since the financial crisis, and as a result, U.S. pension funds are in their best shape in many years,” says Chris DeMeo, head of Investment for the Americas for the New York-based Towers Watson. “The global economic recovery continued to gain momentum throughout 2013, thanks to the absence of major negative events and a stream of positive economic news. After such a long period of financial retrenchment and uncertainty, this is extremely encouraging.
DeMeo adds that generally, U.S. pension funds are now implementing investment strategies that are more flexible and adaptable, and contain a broader view of risk to make greater allowance for the sort of extreme economic and market volatility they have experienced during the past five years. “This is just as well,” he says, “because the global economic recovery—and the implied normalization of market conditions—is by no means guaranteed.”
Plan Asset Findings
With regard to plan asset data for the U.S., the study found that:
- The ratio of U.S. pension assets to GDP increased from 86% in 2003 to 113% in 2013;
- About 20% of assets in the U.S. were allocated to alternative investments in 2013; and
- Equity allocations for U.S. pension funds increased from 54% in 2008 to 57% in 2013.
The study also examined global asset data for the P13 in 2013. The P13 refers to the 13 largest pension markets included in the study, which are Australia, Canada, Brazil, France, Germany, Hong Kong, Ireland, Japan, the Netherlands, South Africa, Switzerland, the UK and the United States. This group accounts for more than 85% of global pension assets. The findings in this area include:
- The 10-year average growth rate of global pension assets (in local currency) is just under 8%;
- The largest pension markets are the U.S., the UK and Japan with 59%, 10% and 10% of total pension assets, respectively;
- All markets in the study have positive 10-year compound annual growth rate (CAGR) figures (in local currency);
- In terms of 10-year CAGR figures, South Africa has the highest growth rate (over 14%), followed by Hong Kong (12%), Australia (12%), the UK (11%) and Brazil (11%). The lowest CAGR figures are Switzerland (5%), France (1%) and Japan (1%);
- Ten-year figures show the UK grew its pension assets the most as a proportion of GDP (increasing 64%, to reach 131%), followed by the Netherlands (up 56%, to 170% of GDP) and the U.S. (up 27%, to 113% of GDP); and
- During this time, Japan’s ratio of pension assets to GDP has fallen by 3%, to 65% of GDP, and Brazil’s and France’s ratios each fell by 2%, to 13% and 6% of GDP, respectively.
Asset Allocation Findings
Asset allocation for the P7 were also examined in the study. The P7 refers to the seven largest pension markets (almost 96% of total assets in the study), and excludes Brazil, Germany, France, Ireland, Hong Kong and South Africa. The findings include the fact that:
- Bond allocations for the P7 markets have decreased by 12% in aggregate during the past 19 years (from 40% to 28%). Allocations to equities have fallen by 3% (to 52%) during the same period;
- Equity allocations by Japanese pension funds have risen from 22% in 2003 to 40% in 2013, while equity allocations by UK pension funds have fallen from 65% to 50% in the same period. The Netherlands’ equity allocations fell from 40% to 35%, and Canada’s allocation to equities fell from 55% to 48%. U.S. and Australia pension funds have maintained the highest allocation to equities over time, reaching 57% and 54% in 2013, respectively;
- Japanese pension funds still have the highest allocation to bonds (51%), but this represents a significant reduction since 2003, when 71% of its assets were in bonds. Netherlands pension funds have increased their allocation to bonds during this period (from 45% to 50%), as have UK funds (31% to 33%), which are the only two countries in the study to have done so;
- Allocations to alternative assets, especially real estate (and to a lesser extent, hedge funds, private equity and commodities), for the P7 markets have grown from 5% to 18% since 1995; and
- In the past decade, most countries have increased their exposure to alternative assets, with Australia increasing the most (from 8% to 25%), followed by Canada (from 8% to 21%) and the UK (from 3% to 14%). Allocations to alternatives in the Netherlands and Switzerland have remained constant during the same period.
“Since our research began in 1998, there is a clear sign of reduced home bias in equities, with the average weight of domestic equities in pension fund portfolios falling from around 65% in 1998 to just over 44% in 2013,” says DeMeo. “Perhaps surprisingly, during the past 10 years, U.S. pension funds remained the market with the highest bias to domestic equities, while Canadian funds have had the lowest allocation to domestic equities. Regarding home bias in fixed-income investments, the average allocation to domestic bonds as a percentage of total bonds has remained high since the inception of this research, when it was over 88%. Last year, it was around 80%.”
Findings for DB, DC Plans
In terms of defined benefit (DB) and defined contribution (DC) plans for the P7, the study finds that:
- During the 10-year period from 2003 to 2013, the compound annual growth rate of DC assets was 9%, compared with 5% for DB assets;
- DC pension assets have grown from 38% in 2003 to 47% in 2013;
- Australia has the highest proportion of DC to DB pension assets, 84% to 16% in 2013, compared with 83% to 17% in 2012. Only Australia and the U.S. have a larger proportion of DC assets to DB assets; and
- Japan, Canada and the Netherlands are markets dominated by DB pensions, with 97%, 96% and 95% of assets, respectively, invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift toward DC.
DeMeo concludes, “The recovery of U.S. pension plans gives the government, plan sponsors and fiduciaries important breathing room to implement nascent structures for delivering good DC-type retirement plans. They have taken bold steps to provide for those persuaded to save. However, the pressure is on to ensure they are enrolled in well-designed, well-managed retirement plans. New participants’ expectations are high and immediate, but in order to meet these, there should be no lack of diligence to achieve the three most important goals for delivering effective DC plans: good governance, scale and alignment of interests.”
Towers Watson Investment is a global professional services company that offers institutional investors risk assessment, strategic asset allocation, fiduciary management and investment manager selection
More information about the study, including where to download it, can be found here.
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