Wednesday, February 3, 2010

Global Pension Assets Hit $23 Trillion Mark

Reuters reports that Global pension funds return to stocks in 2009:

Recovering share prices attracted pension funds in 2009, reversing a trend in favour of bonds in the wake of the credit crisis, a study by consultant Towers Watson said.

Pension schemes allocated 54.4 percent of their assets to equities last year up from 48 percent in 2008, with the UK, United States, Australia and Canada investing above this average level, the study said.

British pension funds, however, have steadily cut their exposure to equities, to 60 percent in 2009 from 77 percent in 1999.

Investments in bonds decreased to 26.9 percent from 32.1 percent in 2008, bucking a trend which saw pension funds' allocations to this asset class grow from 24.5 percent in 2005.

As well as returning to higher risk assets, pension funds broadened their investment horizons to improve diversification, with allocations to real estate in particular and to a lesser extent hedge funds, private equity and commodities, growing to 17 percent from 12 percent in the last five years, the study said.

Swiss and Dutch pension schemes had the largest allocation to alternative assets, such as property.

Global institutional pension fund assets in the major markets increased by 15 percent to over $23 trillion in 2009, but that did not make up for the 21 percent losses in 2008.

"In order to get back on track, (schemes) will be reviewing all options, including extra contributions from sponsors, contingent funding arrangements, investment strategy reviews," said Roger Urwin, global head of investment content at Towers Watson.

In her article in the Telegraph, Rachel Cooper reports Pension assets hit $23 trillion mark:

Asset values increased to more than $23 trillion (£14 trillion) during 2009, according to a study by Towers Watson, while pension balance sheets strengthened by 10pc compared to a 25pc slide in 2008.

During the financial crisis of 2008, asset values tumbled by 21pc, but Towers Watson said that last year's spike had brought assets in the 13 major markets back to 2006 levels.

Despite losing market share during the last decade, the UK remains one of the largest pension markets, accounting for 8pc of total global pension fund assets, while the US and Japan remain the biggest markets accounting for 57pc and 14pc respectively.

Pension assets now amount to 70pc of the average global gross domestic product, down from 76pc a decade earlier.

Roger Urwin of Towers Watson said the financial crisis had been a "huge wake-up call", but warned that "problems of poor systemic design in the industry" increased the chance of further periods of financial distress. He added that recovery in the markets should not "stifle recognition" of these problems as major issues to address, adding that "without exceptional leadership", pensions and investments faced "another tough decade".

Roger Urwin is absolutely right. There are serious structural gaps plaguing the pension industry, the least of which is how to properly align the interests of stakeholders with pension fund managers who take increasingly riskier bets to meet unrealistic actuarial rates of return.

In order to meet these return targets, pensions are now leveraging up, buying more private market assets or investing directly into hedge funds (essentially loading up on more leverage). When times are good, these bets pay off, stakeholders are happy, and pension fund managers get to reap huge bonuses (even if it's all just leveraged beta).

However, when disaster strikes, leverage kicks in on the opposite end, hitting these pension funds hard. Those who were most exposed to stocks, illiquid asset classes and illiquid instruments were the ones that got hit the hardest in 2008.

But for now, that $23 trillion is being invested in all sorts of liquid and illiquid risks assets. How long will this last? As long as the liquidity rally keeps going and markets keep grinding higher. There is a symbiotic relationship between pension funds, hedge funds, and private equity funds that drives these liquidity rallies for a lot longer than most skeptics think.

As long as the music keeps playing, everyone is happy. But when the tide shifts, as it inexorably will, watch out below, those that took the stupidest risks will be the first to succumb to the market's wrath.

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