U.S. Pension Fund Assets Remain Stable

Institutional pension fund assets in the U.S. totaled $21.7 trillion at the end of 2015, a slight dip from the previous year’s record of $22.1 trillion, according to Willis Towers Watson’s Global Pension Assets Study. 

Global institutional pension fund assets in the 19 major markets weighed in at $35.4 trillion at the end of 2015. (Chile, India and Spain were added this year to the study.) The global assets are equivalent to 80% of their underlying countries’ GDP and account for around 35% of the institutional assets available to investors in world capital markets. Global pension fund assets have now grown at 5%, on average, per annum since 2005, when they were just in excess of $21 trillion.

While asset values changed little in 2015, the study highlights the “significant move in pension design toward defined contribution (DC),” underscored by the rapid growth of DC assets for the 10-year period to 2015, with a compound annual growth rate (CAGR) of 7%, against a rate of just over 3% for defined benefit (DB) assets. As a result, DC plan assets now represent more than 48% of global retirement plan assets.

“While the shift to DC, led by the U.S. market, has been the trend for some years now, DC has recently become the dominant global model,” says Steve Carlson, head of the company’s Americas investment business.

The study confirms a number of trends in pension fund investment strategy. Allocations to alternative assets—especially real estate, and to a lesser extent, hedge funds, private equity and commodities—in the larger markets have grown from 5% to 24% since 1995. In the past decade, most countries have increased their exposure to alternative assets, with Canada increasing them the most (from 14% to 27%), followed by the U.K. (7% to 18%), Switzerland (18% to 29%), the U.S. (17% to 27%) and Japan (3% to 9%).

The study also confirms the increased globalization in equities. The home bias in equities has diminished with the weight of domestic equities in pension portfolios falling, on average, from 65% in 1998, to 43% in 2015. During the past 10 years, U.S. pension plans have maintained the highest bias to domestic equities (63% in 2015). Canada remains the market with the lowest allocation to domestic equities (25% in 2015). The research shows Canadian and U.S. funds have retained a very strong home bias in fixed-income investment since the research began (98% and 87%, respectively in 2015), while Swiss funds have reduced exposure to domestic bonds significantly since 1998 (down by 34%).

“Asset diversification into alternatives and the shift away from domestic equities have gained momentum among pension funds around the world, and the persistent global economic uncertainty is likely to reinforce these shifts,” Carlson says. “The challenges of pension funds worldwide show no signs of respite, while the success formula remains being tough on risk and being smart on governance.”

The P7 refers to the seven largest pension markets—Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S—almost 93% of total assets in the study. Bond allocations for the P7 markets have decreased, by 7% in aggregate, during the past 20 years (36% to 29%). Allocations to equities have fallen, by 8% (to 44%) during the same period.

In all the P7 markets, equity allocations have fallen. Equity allocations by U.K. pension funds have decreased, from 66% in 2005, to 43% in 2015, while equity allocations by Japanese pension funds have fallen, from 49% to 31%, in the same period. 

During the same period, U.S. equity allocations fell, from 61% to 47%, and Australia’s allocation to equities fell, from 56% to 48%. Australian funds have maintained the highest allocation to equities over time, reaching 48% in 2015.

U.K. pension funds have increased their allocation to bonds during this period (from 25% to 37%), as have Japanese funds (from 44% to 57%). Two countries in the study have meaningfully decreased their allocations to bonds during this period: Switzerland (from 41% to 35%) and Australia (from 19% to 14%).

Other highlights from the study, on DC/DB assets for the P7 market:

• In 2015, Australia had the highest proportion of DC to DB pension assets, 87% to 13%, followed by the U.S., 60% to 40%. Only Australia and the U.S. have a larger proportion of DC assets than DB assets.
• Japan, Canada and the Netherlands are markets dominated by DB pensions with 96%, 95% 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.

Carlson notes that DC funds still remain handicapped by the limitations in governance models, risk sharing models and investor understanding. “We remain concerned that pension provisions will fall short of member expectations based on a central investment outlook for decidedly skinny returns, which is compounded by relatively low contribution rates,” he says. “On top of capital market risks, there remain equally important overarching challenges for DC plans of heightened regulatory scrutiny, governance mismanagement and general missed opportunity to reframe the focus on DC as a retirement vehicle instead of a savings-only vehicle.”

The Global Pensions Asset Study 2016 analyzes the 19 largest pension markets globally: Australia, Brazil, Canada, Chile, France, Germany, Hong Kong, India, Ireland, Japan, Malaysia, Mexico, the Netherlands, South Africa, South Korea, Spain, Switzerland, the U.K. and the U.S. All figures are rounded, and 2015 figures are estimates. All dates refer to the calendar end of that year. The Global Pensions Asset Study can be downloaded the Willis Towers Watson website.