DC assets predicted to overtake DB assets in the next few years. UK pension funds’ allocations to equities fell by a third in the past decade, while exposure to domestic equities has more than halved since 1998.
UK pension funds have increased allocations to bonds from 24 percent to 37 percent since 2004. UK pension funds have more than doubled exposure to alternative assets since 1995, increasing their allocation to 15 percent DC assets now account for almost a third of total UK pension fund assets. Since 2004 only the Netherlands have grown their pension assets as a proportion of GDP by more than the UK. Global institutional pension fund assets in the 16 major markets grew by over 6 percent during 2014 (compared to around 10 percent in 2013) to reach a new high of US$36 trillion, according to Towers Watson’s Global Pension Assets Study released today. The growth is the continuation of a trend which started in 2009 when assets grew 18 percent, and in sharp contrast to a 22 percent fall during 2008 when assets fell to around US$20 trillion. Global pension fund assets have now grown at 6 percent on average per annum (in USD) since 2004.The research shows that defined contribution (DC) assets grew rapidly for the ten-year period to 2014, with a compound annual growth rate (CAGR) of 7 percent, against a rate of over 4 percent for defined benefit (DB) assets. As a result DC pension assets have grown from 38 percent of all pensions assets in 2004 to 47 percent in 2014 and are expected to overtake DB assets in the next few years.
Roger Urwin, global investment director at Towers Watson, said: “The inexorable shift to DC, which we believe will soon constitute the majority of global pension fund assets, means it is becoming the dominant global pensions model. This brings with it the transfer of risk and a new tension in the balance of ownership and control, which will test governments and pension industries around the world. These billions of new pension members have high and immediate expectations in a world of low returns and in many cases where the benefits of pooling are not fully exploited. This pressure is likely to accelerate the emergence of a more effective “value chain”, where expense on various activities has a better value proposition than exists today. The use of passive approaches and smart betas in DC will lead to fee compression. So far that that fee compression has been small but over time it is likely to be a large disruptive force.”
According to the study, pension assets now amount to around 84 percent of global Gross Domestic Product (GDP), substantially higher than the 54 percent recorded in 2008. Roger Urwin said: “While there has been a significant improvement in various pension balance sheets around the world since the financial crisis, many DB pension funds are still in very weak solvency positions. With global pension assets at only 84 percent of global GDP, the pensions industry gets quite poor marks for providing good value for the worker and pensioner populations. The acid test for national pension systems should be to get assets to at least 150 percent of GDP. If that were combined with an improving recognition of good governance as a return driver and sustainable investing as genuinely value adding, it would put the pensions world in much better shape.”
According to the research, there is a clear sign of reduced home bias in equities, as the weight of domestic equities in pension portfolios fell, on average, from 65 percent in 1998 to 43 percent in 2014. During the past ten years US pension plans have maintained the highest bias to domestic equities (67 percent in 2014), having also increased domestic equity bias during the past three years. Canadian and Swiss funds remain the markets with the lowest allocation to domestic equities (33 percent and 34 percent respectively in 2014) while UK exposure to domestic equities has more than halved, to 36 percent, since 1998. The research shows Canadian and US funds have retained a very strong home bias in fixed income investment since the research began (98 percent and 91 percent respectively in 2014), while Australian and Swiss funds have reduced exposure to domestic bonds significantly since 1998: down by 31 percent and 17 percent respectively during this period.
According to the research 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 percent to 25 percent since 1995. In the past decade most countries have increased their exposure to alternative assets with Australia increasing them the most (from 10 percent to 26 percent), followed by the US (16 percent to 29 percent), Switzerland (16 percent to 28 percent), Canada (13 percent to 22 percent) and the UK (from 7 percent to 15 percent). Roger Urwin said: “This shift away from domestic equities is one indication of an increased focus on risk management and there are others such as diversification of assets in portfolios, which is also increasing. However from working with an increasing number of CIOs at pension funds, this focus on risk is producing two very different groups: those where the appetite for risk is being trimmed and those needing more risk to get them out of their deficit. As a result, the pensions world has to be considered at an increasingly contextual level to understand its present state and make projections about its future.”
Other highlights from the report include: Global asset data for the P16 in 2014
The ten-year average growth rate of global pension assets (in local currency) is just over 8 percent. The largest pension markets are the US, the UK and Japan with 61 percent, 9 percent and 8 percent of total pension assets, respectively. All markets in the study have positive ten-year compound annual growth rate (CAGR) figures (in local currency).
In terms of ten-year CAGR figures (in local currency terms), Mexico has the highest growth rate of over 19 percent followed by South Africa (13 percent), Australia (11 percent), Hong Kong (10 percent), Brazil (10 percent) and the UK (9 percent). The lowest are Japan (1 percent), France (3 percent) and Switzerland (3 percent). Ten-year figures (in local currency) show the Netherlands grew their pension assets the most as a proportion of GDP by 51 percent to reach 166 percent followed by the UK (up 37 percent to 116 percent of GDP), the US (by 32 percent to 127 percent of GDP).
Asset Allocation for the P7
Bond allocations for the P7 markets have decreased by 9 percent in aggregate during the past 19 years (40 percent to 31 percent). Allocations to equities have fallen by 7 percent (to 42 percent) during the same period. Equity allocations have fallen in all of the P7 markets. Equity allocations by Japanese pension funds have decreased from 48 percent in 2004 to 33 percent in 2014 while equity allocations by UK pension funds have fallen from 67 percentto 44 percent in the same period. While in the Netherlands equity allocations fell from 39 percent to 30 percent and Canada’s allocation to equities fell from 51 percent to 41 percent. Australian pension funds have maintained the highest allocation to equities over time, reaching 51 percent in 2014.
UK pension funds have increased their allocation to bonds during this period (from 24 percent to 37 percent) as have Japanese funds (from 44 percent to 57 percent); the only two countries in the study to have decreased their allocation to bonds during this period are Australia (from 21 percent to 15 percent) and Switzerland (from 43 percent to 36 percent).
DC / DB assets for P7
Australia has the highest proportion of DC to DB pension assets: 85 percent / 15 percent, followed by the US: 58 percent / 42 percent. Only Australia and the US have a larger proportion of DC assets than DB assets. Japan, Canada and the Netherlands are markets dominated by DB pensions with 97 percent, 96 percent and 95 percent of assets respectively invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift towards DC.
