Global institutional pension fund assets in 22 major markets grew to USD36.4 trillion at year end 2016, an increase of 4.3 per cent in the 12-month period, according to Willis Towers Watson’s Global Pension Assets Study.
Total pension assets in these countries amount to 62 per cent of their GDP.
The report also shows pension fund assets have grown at 3.8 per cent on average per annum (in USD) over the past five years, with the growth rate highest in China (20.3 per cent), where the study covers the Enterprise Annuities market, and lowest in Japan (-5.4 per cent).
Growth in defined contribution (DC) assets continued to outstrip that of defined benefit (DB) assets, with DC assets now accounting for over 48 per cent of global pensions assets, compared with around 41 per cent in 2006. DC assets have grown at a rate of 5.6 per cent over the past decade, compared with 2.6 per cent for DB assets.
During the past 20 years, the study also identified a fall in allocations to equities and bonds, offset by an increase in allocations to alternative assets.
Roger Urwin (pictured), global head of investment content at Willis Towers Watson, says: “Pension funds worldwide made some progress against their headwinds in 2016. This was largely because equity markets and alternative asset classes produced gains ahead of expectations. While funds in many countries have large pension outflows to deal with, it was encouraging to see overall asset values rise in the vast majority of countries covered in the study.”
The study also confirms a continuing globalising trend as indicated in the reduction in pension funds’ bias to domestic equities markets, with the weighting of domestic equities falling on average from 69 per cent in 1998 to 43 per cent in 2016. Of the markets analysed, Switzerland, Canada and the UK had the lowest percentage allocation to domestic equities markets, whilst US funds had the highest exposure to domestic equities.
Urwin says: “Managing risk has continued to be a focal point for pension funds around the world. The principal strategy for this is increased diversification, as evidenced in the upward trend in allocations to alternative assets and a sustained shift from domestic equities markets. An increasing number of funds are using more sophisticated liability hedging techniques, often referred to as liability driven investing. With geopolitical events adding to existing uncertainty across regions, these are likely to be continuing trends. The key to success will therefore be in confronting global, regional and local risks, in addition to remaining on top of regulatory changes and improving governance practices.
“This study suggests that the key medium-term trends for pension funds continue to be: focus on risk, attention to governance, pensions design with DC models in the ascendant, pressure on talent, streamlining of the value chain and integrating ESG considerations. Each of these is a tough challenge, taken together they multiply to a pretty formidable agenda.”