The 16 major markets included in the study include Australia, Brazil, Canada, France, Germany, Hong Kong, Ireland, Japan, Malaysia, Mexico, Netherlands, South Korea, South Africa, Switzerland, United Kingdom and the United States.
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According to Towers Watson, the growth trend in global fund assets started in 2009. At the time, the growth rate was 18% compared to a 22% decline in 2008 when the assets dropped to $20 trillion. At present, the average annual growth rate of global pension fund assets is 6%.
Based on the study, the three largest pension fund markets are the United States, which accounts for 61.2% of the total pension assets. United Kingdom and Japan ranked second and third, which account for 9.2% and 7.9% of the total pension assets, respectively. The top three markets account for 78.3% of the total global pension fund assets.
Pension assets currently account for 84% of global GDP
Currently, the pension fund assets account for 84% of the global gross domestic product (GDP), significantly higher than the 54% recorded in 2008.
Roger Urwin, global investment director at Tower Watson noted the significant improvement in the balance sheets of different pension funds around the world since the financial crisis. However, he also observed that many defined benefit (DB) pension funds are “still in very weak positions.”
Urwin added, “the pension industry gets quite poor marks for providing good value for the worker and pensioner populations” given the fact that the pension assets is only 84% of the global GDP.”
“The acid test for national pension systems should be to get assets to at least 150% of GDP,” said Urwin. According to him, the pension industry would be in a much better shape if pension assets at 150% of GDP are combined with an improving recognition of governance as a return driver and sustainable investing.
DC assets becoming the dominant global pension fund model
The study found that defined contribution (DC) assets increased rapidly over the past ten years with a compound annual growth rate (CAGR) of 7%. DC pension assets rose from 38% of all pension assets in 2004 to 47% in 201.
On the other hand, the defined benefits (DB) assets have 4% CAGR. The study suggested that DC assets are expected to surpass DB assets for the next few years.
According to Urwin,” DC assets will soon constitute the majority of global pension fund assets the inevitable shift to it. He noted that DC assets is the becoming the dominant global pension fund model.
He also suggested that governments and pension industries worldwide will be put to test given the transfer of risk and a new tension in the balance of ownership and control.
“These billions of new pension members have high and immediate expectations in a world of low returns and in many cases where the benefits of pooling are not fully exploited,” said Urwin
“This pressure is likely to accelerate the emergence of a more effective value chain…The use of passive approaches and smart betas in DC will lead to fee compression. So far, that fee compression has been small but over time it is likely to be a large disruptive force,” he added.
U.S. maintained highest allocation to domestic equities
Over the past ten years, U.S. pension funds maintained the highest allocation to domestic equities with 67% in 2014.
Canadian and Swiss pension funds remained with the lowest allocation to domestic equities with 33% and 34%, respectively last year. The United Kingdom’s allocation to domestic equities dropped more than half to 36% since 1998.
The study indicated a clear sign of reduced biased to in domestic equities given its reduced weight in the portfolio of pension funds. Allocations to home equities dropped from 65% in 1998 to 43% last year.
According to Urwin, global pension funds are now more focused on risk management given the move away from domestic equities. He also noted an increasing diversification of assets in the portfolios of other pension funds.
The allocations of global pension funds to alternative assets particularly real estate as well as hedge funds, private equity and commodities (lesser extent) increased from 5% to 25%, according to the study.
Australia recorded the highest increase in allocation to alternative assets from 10% to 26% followed by the United States from 16% to 28% and Canada from 13% to 22%.