Globally, institutional pension fund assets in the 16 major markets grew by over 6% during 2014 (compared to around 10% in 2013) to reach a new high of $36 trillion, according to the research. The growth is a continuation of a trend that started in 2009, when assets grew 18%, 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 annual rate of 6% since 2004.
The Towers Watson study also shows that defined contribution (DC) assets grew rapidly for the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%, versus a rate of over 4% for defined benefit (DB) assets. As a result, DC plan assets have grown from 38% of all pension assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years. In the US, DC assets continued to climb steadily and now represent 58% of all assets, up from 52% in 2004 and 55% in 2009.
“The continuing shift to DC plans means they are becoming the world’s most prevalent retirement savings model,” said Steve Carlson, head of Towers Watson’s Americas Investment practice. “This shift brings a transfer of risk and new tension to the balance between ownership and control, which will test governments and pension industries around the world.”
According to the study, pension assets now amount to around 84% of the global gross domestic product (GDP), substantially higher than the 54% recorded in 2008. In the US, the ratio of pension assets to GDP increased from 95% in 2004 to 127% in 2014.
“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 funded positions. However, in the US, pension plans are in a better position, given the contribution flexibility,” said Mr. Carlson.
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% in 1998 to 43% in 2014. During the past 10 years, US pension plans have maintained the highest bias to domestic equities (67% 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% and 34%, respectively, in 2014), while UK exposure to domestic equities has more than halved, to 36%, since 1998. 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 91%, respectively, in 2014), while Australian and Swiss funds have reduced exposure to domestic bonds significantly since 1998 — down by 31% and 17%, respectively, during this period.
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 25% since 1995, according to the research. In the past decade, most countries have increased their exposure to alternative assets, with Australia increasing them the most (from 10% to 26%), followed by the US (from 16% to 29%), Switzerland (from 16% to 28%), Canada (from 13% to 22%) and the UK (from 7% to 15%).
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 800 associates worldwide, assets under advisory of over $2.2 trillion and over $75 billion of assets under management.
© 2015 PEPD • Private Equity’s Leading News Magazine • 2-9-15