Market turmoil around the world took its toll on pension assets last year, according to a new study by Willis Towers Watson Plc, the London advisory firm. Specifically, pension assets relative to gross domestic product declined 3.9 percentage points in 2015 to 80.3% from 84.2% the year before.
Pension assets relative to GDP at some big countries fall far below that level, including France at 6.2%, Germany at 12.7% and Spain at just 3.3%.
By that measure, however, the U.S. is faring well. Pension assets in the U.S., by far the largest market studied, amounted to a relatively healthy 121.2% of the nation’s GDP. “The U.S. is in relatively good shape,” said Mark Ruloff, director of asset allocation at Willis Towers.
The study looked at looked at 19 markets, ranging from the Netherlands to South Korea and analyzed a variety of factors effecting pension assets, including asset growth, allocations, and the ratio of defined benefit to defined contribution based plans. The type of pension assets studied sometimes varied between countries: For example, the U.S. figure includes IRA accounts. Those for Switzerland excluded insurance company assets.
On the surface, last year’s market volatility had only a relatively minor impact on total assets of the markets studied, which fell just 0.5% to $35.4 trillion at the end of 2015 from $35.6 trillion the year before. That’s partly because of the stability of inflows. “We still have companies and individuals contributing,” said Mr. Ruloff.
Overall, pension assets rose at a compounded annual growth rate of 5.1% for the ten years through 2015, based on year end estimates and calculated in U.S. dollars. The U.S. pension assets grew at a 5.8% clip and Chile’s at a 14.2% rate, while Japan’s declined at a 1% rate over the ten year period.
A more detailed analysis of seven of the 19 pension asset markets showed that equity allocations declined to an estimated 44% in 2015 from 52% in 1996. Pension assets invested in bonds declined to 29% from 36% over that time, cash fell to 3% from 5% and real estate and other alternatives grew to 24% from 7%.
In the U.S., 47% of assets were allocated to equities in 2015, down from 61% in 2005, 23% were invested in bonds in 2015, the same percentage as in 2005, and 27% in other assets in 2015, up from 17% in 2005. Cash accounted for 2% of assets in 2015 versus none in 2005. “CFOs should focus on improving the governance of these plans and they should focus on risk factors,” said Mr. Ruloff. That in some cases moving more heavily into alternatives, he added, including private equity and insurance-related bonds.
Indeed, there are other signs of increasing diversification. The study showed a general move away from home market biases, Mr. Ruloff said, which makes sense particularly for stocks. The study showed 42.9% of equities were invested in 2015 domestic issues versus 64.7% in 1998. Domestic bonds accounted for 76.3% of fixed income portfolios in 2015 versus 88.2% in 1998.
The shift toward defined contribution plans, like 401(k) retirement accounts, continues. The study showed defined benefit plans accounted for an estimate 52% of retirement assets in 2015, with 48% in defined contribution plans. That compares to 60% in traditional pensions in 2005, with just 40% in defined contribution plans.