Global – Monday 5 February 2018 – Global institutional pension fund assets in the 22 major markets grew to $41.3 trillion at year end 2017, according to latest figures in the Thinking Ahead Institute’s Global Pension Assets Study, representing the highest figure since the report began in 1997.
The total value of assets grew by $4.8 trillion in 2017, which is the largest single-year growth in USD terms in the last 20 years and represents growth of over 13% during the year.
The report also shows that pension fund assets have grown steadily in the last 20 years at an average rate of 6.2% per annum (in USD terms), closely matching global public market equity and bond returns during the same period.
Roger Urwin, global head of investment content at Willis Towers Watson, said: “While the short-term figures are positive these are due to unusually high market returns. Looking back at 20 years of progress makes for encouraging reading. In particular, the improving position of pension assets as a proportion of GDP and the evolution of pension fund governance, which has risen up trustees’ agendas and is certainly a lot stronger as a result.”
Looking at the relative growth rates of defined contribution (DC) and defined benefit (DB) assets for the seven largest pension markets in the last two decades, the study shows that DC assets grew at 7.9% per annum compared with 4.5% for DB assets.
Roger Urwin said: “DC now accounts for 49% of total assets across the seven largest pensions markets in the world as these funds continue to experience positive net cash flow and relatively lower levels of benefit withdrawals compared to their DB counterparts. As such we would expect DC assets to become larger than DB assets within the next two years. With DC models in the ascendancy, it is important that governance issues and the shift in risk on to the end-saver are closely monitored, without regulation becoming a burden and hindering the ability of DC plans to deliver optimal outcomes.
“Other challenges that lie ahead for funds worldwide include the need for countries with ageing populations to accommodate increased benefit payments. We note a much increased use of liability driven investment strategies (LDI). We also are seeing traditionally DB-focused countries showing signs of a shift towards adopting DC pension plans,” said Roger Urwin.
The study also found reduced home bias for equities in the last 20 years, falling to 41.1% in 2017 from 68.7% in 1998. In the past ten years, the US market has maintained the largest allocation to domestic equities while Canada, Switzerland and the UK have had the lowest.
Roger Urwin said: “Risk management and diversification continue to be a significant focus for asset owners, as epitomised by the inexorable rise of private assets over the lifetime of this study, rising from as little as 4% of allocations in 1997, to around 20% today. As our understanding of these asset classes has increased, so has the sophistication of strategies in allowing funds to go beyond traditional means of diversification.
“The challenges faced by pension funds are complex. Our research suggests that pension plans must consider and address several key issues, such as: regulation; changes in the available investment universe; new investment methods; and how to measure progress and success of a pension plan. There is also the developing issue of true integration of ESG, stewardship and sustainability within overarching investment strategies,” added Roger Urwin.
“These funds have given more attention to sustainability issues over time and have become more conscious of the footprints they leave on the world. Looking ahead, it seems that the shift in their style of fiduciary capitalism will act a positive stabilising influence on the world’s financial system,” said Roger Urwin.
Other highlights from the study include:
Global asset data for the P22 in 2017
- The US (61.4%), continues to be the largest market in terms of pension assets followed by the UK (7.5%) and Japan (7.4%).
- Total pensions assets to GDP ratio were 67% at the end of 2017.
- The Netherlands continues to have the highest ratio of pension assets to GDP (194%) followed by Australia (138%) and Switzerland (133%).
- The average ten-year compound annual growth rate (CAGR) figures (in USD) for P22 markets is 4.2%.
- Estimated five-year growth rates (in local currency) range from 2.0% per annum in Spain to 19.1% in China.
- Whilst the US continues to hold the largest weighting (61%) within the P22, the weights of Brazil, Canada, Finland, France, Germany, Ireland, Japan, Netherlands, South Africa, Spain and UK have declined relative to the other markets in the study.
- Ten-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP by 68% to reach 194%, followed by the UK (88% to 121%), Canada (83% to 108%) and the US (106% to 131%).
Asset Allocation for the P7
- Equities allocations for the P7 markets have decreased by 11% in aggregate during the past 20 years (57% to 46%).
- Allocations to bonds have also fallen in P7 markets during the same period, from 35% in 1997 to 27% in 2017.
- Pension fund assets managed by the top 100 alternative asset managers rose to USD 1,612 billion in 2017 according to Willis Towers Watson’s Global Alternatives Survey.
- The Netherlands (43% to 50%), Japan (50% to 56%), and the UK (30% to 35%) are the three markets which have increased allocations to bonds by the largest amount during the past ten years.
DC / DB assets for P7
- In 2017, Australia continued to have the highest proportion of DC to DB pension assets, with 87% of its total pension assets in DC funds.
- DC pension assets have grown from around 33% in 1997 to 49% in 2017 of total pension assets.
- Japan (96%), Canada (95%) and the Netherlands (94%) and the UK (81%) continue to be markets dominated by DB pensions assets.
Notes to editors
- The P22 refers to the 22 largest pension markets included in the study which are Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Spain, Switzerland, the UK and the US.
- The P7 refers to the 7 largest pension markets (91.7% of total assets in the study): Australia, Canada, Japan, Netherlands, Switzerland, UK and US.
- All figures are rounded and 2017 figures are estimates.
- All dates refer to the calendar end of that year.
About the Thinking Ahead Institute
The Thinking Ahead Institute is a global not-for-profit member organisation whose aim is to influence change in the investment world for the benefit of savers. The Institute’s members comprise asset owners, investment managers and other groups that are motivated to influence the industry for the good of savers worldwide and is an outgrowth of Willis Towers Watson Investments’ Thinking Ahead Group.
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 40,000 employees serving more than 140 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.
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