Global institutional pension fund assets in the 22 markets included in the Global Pension Assets Study grew to $36.4 trillion in 2016, an increase of 4.3% from the previous year. This is the continuation of a growth trend which, during the past five years, averages almost 4% in US dollar terms and means pension fund assets now account for around 35% of the institutional assets available to investors in the world capital markets portfolio. The United States continues to be the largest pensions market by assets followed by the United Kingdom and Japan; and together these three markets account for over three-quarters of total pension assets globall
During 2016 pension funds worldwide made some progress against their headwinds, largely due to equity markets and alternative asset classes producing solid returns. It is notable that overall asset values rose in the vast majority of countries covered in the study.
In the past 20 years, the study identifies significant changes in pension fund asset allocation. In the seven largest markets equity allocations decreased by 11 percentage points in aggregate (from 57% to 46%) while overall allocations to bonds also fell (from 35% to 28%). By contrast, the Netherlands, the United Kingdom and Japan are the three markets which increased allocations to bonds the most – all by over ten percentage points – during the past ten years.
This is not surprising given managing risk remains a focal point for pension funds around the world. Additional strategies for this is increased diversification, as evidenced in the upward trend in allocations to alternative assets and a sustained shift from domestic equity markets. The study shows that pension funds in aggregate now allocate around a quarter of their portfolios to alternative(s) assets, up from 4% 20 years ago, and the investment in domestic equities has fallen from 69% in 1998 to 43% now. Switzerland, Canada and the United Kingdom have the lowest percentage allocation to domestic equities markets, while funds in the United States maintain the highest exposure.
The study suggests that the key medium-term trends for pension funds are: the aforementioned focus on risk; attention to governance; pressure on talent; streamlining of the value chain and integrating ESG considerations; and pensions design with DC models in the ascendancy. Indeed DC assets have grown at a rate of 5.6% per annum compared with 2.6% for DB assets in the past decade. As a result they now account for over 48% of global pensions assets, compared with around 41% ten years ago. Australia has the highest proportion of DC to DB pension assets, with 87% of its total pension assets in DC funds, followed by the United States which has 60%. Japan (96%), Canada (95%) and the Netherlands (94%) continue to be dominated by DB pensions assets.
With geopolitical events adding to existing uncertainty across regions, all these trends are likely to continue. The key to success will therefore be in confronting global, regional and local risks, in addition to remaining on top of regulatory changes and improving governance practices. Each of these is a tough challenge, taken together they multiply to a pretty formidable agenda.