A study by Towers Watson covering 13 major pension markets finds that pension assets in these markets aggregated $31,980 billion as at the end of 2013, and that they represented 83.4% of GDP.

The study also noted that compared to 2012, assets grew 9.5% while the ratio to GDP increased 7.8% from 75.6% in the previous year. It may be noted that the ratio of assets to GDP stands at the highest level since this study commenced.

Pension funds no longer in the news for the wrong reasons

The results of the study show that pension funds seem to have moved on from the days when they were generally in the news for being in crisis mode due to under-funding. Indeed, as of December 2012, corporate pensions funds in the S&P 1500 were under-funded to the extent of $557 billion, as per Mercer.

But all this went through a sea change thanks to the huge run-up witnessed in equity markets in recent years. “During 2013 equities enjoyed their best calendar year of risk-adjusted return since the financial crisis and as a result pension funds in most markets are in the best shape they have been for many years,” said Carl Hess, global head of investment at Towers Watson.

Pension assets – top 13 countries

Pension Funds

The study says the largest three markets are the US, UK and Japan constituting 59.0%, 10.2% and 10.1% of the global pension assets tally. During 2013 these countries grew their pension assets by 12.0%, 13.3% and 2.2% respectively.

How pension assets grew in the top 13 countries

1a-asset-growth

In terms of ten-year CAGR figures (in local currency terms), the highest growth rates were clocked by South Africa of over 14%, Hong Kong (12%) and Australia (12%). The lowest growth rates were seen in Japan (1%), France (1%) and Switzerland (5%).

Asset allocations by pension funds in the top 7 countries

The U.S. pension funds had the maximum allocation of 57% to equities with Switzerland only allocated 33%. Japanese funds had 51% in bonds but Australian funds allocated only 13% to this asset class.

2-asset-allocations

Allocations to other (alternative) assets such as real estate, hedge funds, PE and commodities have grown from 5% to 18% since 1995, says the study. See this trend in the chart below.

2a-asset-alloc-trends

Defined Benefits (DB)/Defined Contributions (DC) assets split

DC assets in the top 7 countries grew at a CAGR of 9% during 2003 through 2013 whereas DB assets grew only 5% during that period. DC pension assets have grown from 38% in 2003 to 47% in 2013.

3-db-dc-split

It therefore appears that there is a gradual shift from DB to DC across the top 7 countries. However, DB pensions continue to be firmly entrenched in Japan, Canada and the Netherlands all of which have 95% and above of assets marked towards DB pension funding.

“The recovery of most pensions systems globally gives governments, plan sponsors and fiduciaries an important breathing space to implement nascent structures for delivering good DC-type pensions. In many countries, governments and pension industries have taken bold steps to provide for those persuaded to save, however the pressure is on to ensure they are enrolled into well-designed, well-managed schemes,” said Carl Hess. “New pensions members’ expectations are high and immediate but in order to meet these there should be no let-up in the pressure to achieve the three most important goals for delivering good DC plans: good fund-level governance, scale and alignment of interests.”