Total assets of the world’s largest 300 pension funds grew by over 3 per cent in 2014 (compared to around 6 per cent in 2013) to reach a new high of over USD15 trillion, according to Pensions & Investments (P&I) and Towers Watson research.
Ten years ago, total assets at the world’s largest pension funds grew by 27 per cent to reach USD8.4 trillion and move above the previous high of USD6.6 trillion, reached in 2003.
The Towers Watson global 300 research, conducted in conjunction with P&I, a leading US investment newspaper, shows that by individual region, North America had the highest five-year combined compound growth rate, around 8 per cent, compared to Europe (over 7 per cent) and Asia Pacific (around 4 per cent). The research also shows that the world’s top 300 pension funds now represent around 43 per cent of global pension assets.
According to the research, defined benefit (DB) funds account for 67 per cent of total assets, down from 75 per cent five years ago. During 2014, defined contribution (DC) assets grew the most, by almost 5 per cent, followed by DB plans assets (almost 4 per cent) and reserve funds2 (over 1 per cent), while hybrid plan assets decreased by over 2 per cent.
“Despite significant asset growth over the past decade, there is a growing feeling that the investment industry has not focused enough on the end beneficiaries’ needs or on managing costs in the ‘investment food chain’,” says Steve Carlson (pictured), head of Investment, Americas, at Towers Watson. “Instead, it has focused on relative returns over total returns and has allowed excessive risk to build up in portfolios while costs have increased to a level that is far higher than can be justified in aggregate. The top funds are moving to address this and related issues. Given the shift to DC plans, where the end beneficiary comes first, we can expect a very different industry in 10 years’ time or sooner.”
According to the research, the US remains the country with the largest share of pension fund assets, accounting for around 38 per cent, while Japan has the second-largest market share with around 12 per cent. The Netherlands has the third-largest market share with 7 per cent, while Norway and Canada are fourth and fifth largest, respectively, with around 6 per cent share each. The research shows that 25 new funds entered the ranking during the past five years, and on a net basis, the countries that contributed the most new funds were South Korea and the UK (two funds), and Australia, France, Peru, Russia, the US and Vietnam (one fund). During the same period, Germany and Japan had a net loss of three funds from the ranking. The US has the largest number of funds in the research (128), followed by the UK (27), Canada (19), Australia (16), Japan (15) and the Netherlands (13).
“The gradual reduction of extraordinary measures from central governments, which has underpinned equity markets since the financial crisis, is now being felt. Without quantitative easing tailwinds, markets are arguably back to functioning normally, which will reinforce many big funds’ belief in the value of being well diversified, particularly at times of stress, which we are again seeing. As such, we expect mature funds to accelerate diversification away from equities and into other asset classes as they continue to de-risk their portfolios and focus on total returns,” said Carlson.
Sovereign pension funds3 continue to feature strongly in the ranking, with 27 of them accounting for 28 per cent of assets and totalling around USD4.2 trillion. The 114 public sector funds in the research had assets of USD6.0 trillion in 2014 and account for 39 per cent of the total. Private sector industry funds (60) and corporate funds (99) account for 14 per cent and 19 per cent, respectively, of assets in the research.
“Many large funds have been making significant changes to the way they invest. This is in line with a single-minded approach of working hard in added-value spaces to find the extra returns that no longer come from the market. In the process, they are increasingly thinking about diversification in the context of all return drivers and adding the necessary governance or outsourcing to ensure success,” said Carlson.
