Pension funds battered by the financial crisis performed strongly last year after stock markets recovered in the wake of the Greek debt crisis.
Pension fund deficits, which have plagued final salary occupational schemes around the world, narrowed as assets in the 13 largest pension markets hit a record high of $26.5 trillion (£16.4tn).
The figure for pension fund assets dwarfs the $3.5tn amassed by sovereign wealth funds and the $2.5tn of foreign debt owned by the Chinese government.
The steep rise in assets should give pension savers some comfort that commitments to a guaranteed retirement income will be honoured, but experts pointed out that the global asset/liability ratio is still well down from its 1998 level.
Roger Urwin, global head of investment content at Towers Watson, said it is now quite common for a pension fund to be 25% underfunded whereas in the 1990s they were 100% funded.
"By and large pension funds still have a long way to go to make sure assets match their liabilities," he said.
He noted that there were EU efforts under way to press pension funds to have more solvency protection similar to insurance companies. The Netherlands, where pension assets make up 134% of GDP, is usually held up as an example.
UK and US companies have switched employees out of final salary schemes into cheaper arrangements based on stock market returns. The Netherlands has begun to make the switch in the belief that deficits are unlikely to be eradicated while life expectancy continues to increase.
The Towers Watson survey found that pension fund assets increased by 12% in 2010 as stock markets recovered. This compares with 17% growth in 2009 and a 21% drop in 2008 at the height of the financial crisis, which took assets back to 2006 levels. Global pension fund assets have grown 66% since 2000 when they were valued at $16tn. The UK, the third-largest pension market after the US and Japan, has grown to $2.3tn from $1.3tn in 2000. Pension assets now amount to 76% of GDP, an improvement on the 2008 figure of 61%, but still below the pre-crisis level of 78% in 2007.
The UK now has as much invested in pension funds as the value of its GDP. It also has the highest allocation to equities in the world, of 55%, although this is down from 74% in 2000. Just over a third is invested in bonds, 3% in cash and 7% in other assets such as property. Urwin said this was down to culture: "UK pension funds have had a historical orientation to equities for some time. It was almost the first pension fund industry to invest to a large degree in equities."
UK funds have been slow to invest in alternative assets such as property, partly because they are often run by boards of trustees who lack the resources. "Equities are easier to manage than the alternatives."
The US, Australia and Canada also invest more in equities than the rest of the markets. Japan, the Netherlands and Switzerland are more risk averse, with higher than average exposure to bonds.
At the end of 2010, the average global asset allocation of the seven largest markets was 47% equities, 33% bonds, 1% cash and 19% other assets.
In the UK, 90% of pension assets are held by private sector companies. The picture is similar in Australia where 86% of assets are in the private sector. By contrast, 70% of assets in Japan and 62% of Canadian assets are held by the public sector.
The report also shows that Brazil had the highest growth in pension fund assets, of 15%, over the last decade, followed by South Africa at 13%, Hong Kong at 11% and Australia at 10%. The countries with the lowest growth were Japan with 0.2%, Canada and France, both at 1%, and Switzerland at 2%.
Last year, pension assets rose in almost all 13 markets in dollar terms with the exception of crisis-struck Ireland and France, partly driven by a weaker euro. Australia, Japan, South Africa, Switzerland, Canada and Brazil benefited from their currencies' appreciation against the dollar in 2010. Only the pound and the euro weakened against the dollar, by 2.9% and 7.5% respectively.
Towers Watson provided more information on their website, Global pension fund assets hit record high in 2010:
Global institutional pension fund assets in the 13 major markets increased by 12% during 2010 to reach a new high of US$ 26 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 17%, but in sharp contrast to a 21% fall during 2008 which took assets back to 2006 levels. Global pension fund assets have grown 66% since 2000, when they were valued at US$16 trillion.
The study also reveals that pension fund balance sheets1 globally continued to strengthen during 2010, although the global asset/liability ratio is still well down from its 1998 level. According to the study, pension assets now amount to 76% of the global GDP (71% in 2009), substantially higher than the equivalent figure of 61% in 2008.
Carl Hess, global head of investment at Towers Watson, said: “The global financial crisis is still with us and the ongoing aftershocks are a continual reminder that the nascent economic recovery is still very tenuous. While nervousness about the volatility of markets and extreme events is just below the surface, there is broad acceptance that this is the new normal and that investors will need investment strategies that are more flexible and adaptable than they have been in the past. So while the recovery of the markets is to be welcomed, it should not distract from the major issues confronting the industry and the weaknesses in the system which governments and companies must face up to.”
Other highlights from the report include:
Global asset data for the P13
- On average global pension assets (measured in local currency) grew by over 9% in 2010, taking the ten-year average growth rate to almost 6%.
- The US, Japan and the UK remain the largest pension markets in the world, accounting for 58%, 13% and 9% respectively of total pension fund assets globally.
- All markets saw growth in pension assets in 2010 (measured in local currency), and all markets in the study have positive ten-year compound annual growth rate (CAGR) figures.
- In terms of ten-year CAGR figures (in local currency terms), Brazil has the highest growth of 15% followed by South Africa (13%), Hong Kong (11%) and Australia (10%). The lowest are Japan (0.2%), Canada (1%), France (1%) and Switzerland (2%).
- The Netherlands now has the largest proportion of pension assets to GDP (134%), followed by Switzerland (126%), US (104%), Australia (103%) and the UK (101%). In the past ten years Canada, Ireland and France have seen the greatest fall in the ratio of pension assets to GDP of -19%, -3% and -1% respectively.
Asset Allocation for the P7
- Bond allocations for the P7 markets have decreased by 7% in aggregate during the past 15 years (40% to 33%), while allocations to equities have fallen by 2% (to 47%) during the same period.
- Other assets, especially real estate and to a lesser extent hedge funds, private equity and commodities, have grown from 5% to 19% since 1995.
- Equity allocations in the UK have fallen from 74% in 2000 to 55% in 2010; similarly in the US allocations have fallen from 64% to 49% during the same period.
- Australia, Canada and the US have increased their proportion of alternative assets the most from nearly 8% in 2000 to more than 20% in 2010. Conversely, during the past decade, allocations to alternatives have remained relatively constant in Switzerland (29%), the UK (7%) and Japan (4%).
Roger Urwin, global head of investment content at Towers Watson, said: “Notwithstanding the recovery in markets, asset allocation remains challenging as companies and trustees balance such priorities as long-term de-risking, short-term market opportunities, rebalancing or maintaining a strategic asset allocation mix. These are complex decisions made more difficult in the context of highly changeable market conditions. Additional context for these decisions are the number of solutions on offer, which include extra contributions from sponsors, contingent funding arrangements, investment strategy reviews, hedging strategies and pension insurance buy-ins, not to mention changes to benefits structures including fund closures.”
Defined Benefit (DB) vs. Defined Contribution (DC) for the P7
- During the ten-year period from 2000 to 2010, the CAGR of DC assets was 7.5% against a rate of 2.9% for DB assets.
- DC assets now comprise 44% of global pension assets compared with 41% in 2005 and 35% in 2000.
- Australia has the highest proportion of DC to DB pension assets: 81% / 19%.
- The markets that show a larger proportion of DC assets than DB assets are the US, Australia and Switzerland while Japan and Canada are close to 100% DB. The Netherlands, historically only DB, is now showing signs of a shift towards DC, while Canada is the only market in the study where DC assets have fallen in the last ten years relative to DB.
Roger Urwin said: “Post-crisis, societal pressures and changes give us an opportunity to accelerate the many positive developments around DC pensions; key among these are the effective design and management of default strategies in line with member needs and risk tolerances. Just as we have seen in the DB world, improving clarity around responsibility will lead to more effective governance of DC schemes and a real opportunity to improve the investment outcomes for millions of individuals. Importantly, fiduciaries need the flexibility to decide for themselves how best to implement improvements. But governments must also support greater clarity around the roles and responsibilities of all stakeholders, including members, which in turn will help address a perennial DC stumbling block: clear and relevant communication.”
Notes to editors
- The P13 refers to the 13 largest pension markets included in the study which are Australia, Canada, Brazil, France, Germany, Hong Kong, Ireland, Japan, Netherlands, South Africa, Switzerland, the UK and the US. The P13 accounts for more than 85% of global pension assets.
- The P7 refers to the 7 largest pension markets (over 95% of total assets in the study) and excludes Brazil, Germany, France, Ireland, Hong Kong and South Africa.
- All figures are rounded and 2010 figures are estimates.
- All dates refer to the calendar end of that year.
The Global Pension Assets Study 2011 is available at: http://www.towerswatson.com/research/3761
1 measured by asset values over liability values using sovereign bond yields to discount liabilities.
This study is very interesting because it clearly demonstrates that global pensions are a force to be reckoned with. Trillions of dollars are being invested in global equities, bonds, real estate, infrastructure, commodities, hedge funds and other assets. Those who scoff at pensions just show how ignorant they truly are.
But the study also shows how vulnerable global pensions remain. As Roger Urwin stated: "By and large pension funds still have a long way to go to make sure assets match their liabilities". Pensions aren't just about assets; they're about matching assets to liabilities. To look at one side of the equation without looking at the other is to distort the underlying state of global pensions.
Finally, I noted that Australia, Canada and the US have increased their proportion of alternative assets the most from nearly 8% in 2000 to more than 20% in 2010. The cynic in me tells me it's all about beating benchmarks, compensation and chasing after hot alternatives, but I do recognize the importance of diversification. It remains to be seen if countries allocating a greater proportion of their pension assets to alternatives will outperform on a risk-adjusted basis over the next ten years.
This afternoon a colleague of mine reminded me that "JGBs outperformed the S&P 500 since 1998". I told him: "Wouldn't it be something if US Treasuries outperform all other asset classes in the next ten years?". You just never know.