U.S. institutional pension fund assets totaled $21.7 trillion at the end of 2015, slightly less than the previous year’s record of $22.1 trillion, according to Willis Towers Watson’s (NASDAQ:WLTW) Global Pension Assets Study. Global institutional pension fund assets in 19 major markets weighed in at $35.4 trillion at year-end 2015. (Chile, India and Spain were added to this year’s 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 were little changed in 2015, the study highlights the significant move in pension design toward defined contribution (DC), underscored by DC assets’ rapid growth 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 pension assets now represent over 48% of global pension 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,” said Steve Carlson, head of the company’s Americas Investment business.
“Yet DC funds 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. 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 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,” said Carlson. “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.”
Other highlights from the study include:
Global asset data for the P19 in 2015
The 10-year average growth rate of global pension assets (in local currency) is 7%.
The largest pension markets are the U.S., the U.K. and Japan, with 62%, 9% and 8% of total pension assets, respectively.
All markets in the study have positive 10-year CAGR figures (in local currency), with the exception of Japan.
In terms of 10-year CAGR figures (in local currency terms), Chile has the highest growth rate of 18%, followed by Mexico (15%), South Africa (11%), Australia (9%), Hong Kong (9%), Brazil (8%), Canada (8%), the Netherlands (7%) and the U.K. (7%). The lowest are Japan (-0.2%), Switzerland (2%) and France (2%).
10-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP (by 75% to reach 184%), followed by Chile (by 57% to 118% of GDP), Australia (by 36% to 120% of GDP) and the U.K. (by 32% to 112% of GDP).
Asset Allocation for the P7
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.
Equity allocations have fallen in all the P7 markets. 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%).
DC/DB assets for P7
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.
Notes to editors
The P19 refers to the 19 largest pension markets included in the study: 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. The P19 accounts for around 85% of global pension assets.
The P7 refers to the seven largest pension markets (almost 93% of total assets in the study): Australia, Canada, Japan, the Netherlands, 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.
About Willis Towers Watson Investment
Willis Towers Watson’s Investment business is focused on creating financial value for institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. It has over 850 associates worldwide, assets under advisory of over US$2.2 trillion and over US$75 billion of assets under management.
About Willis Towers Watson
Willis Towers Watson (NASDAQ:WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.
Ed Emerman: +1 609 275 5162
Source: Willis Towers Watson Public Limited Company