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Global pension fund assets reach new highs

Staff writer |
Global institutional pension fund assets in the 16 major markets grew by over 6% during 2014 (compared to around 10% in 2013) to reach a new high of $36 trillion, according to Towers Watson's Global Pension Assets Study.

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The growth is the continuation of a trend which started in 2009 when assets grew 18%, and in sharp contrast to a 22% fall during 2008 when assets fell to around $20 trillion. Global pension fund assets have now grown at 6% on average per annum (in USD) since 2004.

Canadian and US funds have retained a very strong home bias in fixed income investment.
The research shows that defined contribution (DC) assets grew rapidly for the ten-year period to 2014, with a compound annual growth rate (CAGR) of 7%, against a rate of over 4% for defined benefit (DB) assets. As a result DC pension assets have grown from 38% of all pensions assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years.

According to the study, pension assets now amount to around 84% of global Gross Domestic Product (GDP), substantially higher than the 54% recorded in 2008.

The research shows Canadian and US funds have retained a very strong home bias in fixed income investment since the research began (98% and 91% respectively in 2014), while Australian and Swiss funds have reduced exposure to domestic bonds significantly since 1998: down by 31% and 17% respectively during this period.

According to the research allocations to alternative assets - especially real estate and to a lesser extent hedge funds, private equity and commodities - in the larger markets have grown from 5% to 25% since 1995. In the past decade most countries have increased their exposure to alternative assets with Australia increasing them the most (from 10% to 26%), followed by the US (16% to 29%), Switzerland (16% to 28%), Canada (13% to 22%) and the UK (from 7% to 15%).

The ten-year average growth rate of global pension assets (in local currency) is just over 8% The largest pension markets are the US, the UK and Japan with 61%, 9% and 8% of total pension assets, respectively.

In terms of ten-year CAGR figures (in local currency terms), Mexico has the highest growth rate of over 19% followed by South Africa (13%), Australia (11%), Hong Kong (10%), Brazil (10%) and the UK (9%). The lowest are Japan (1%), France (3%) and Switzerland (3%) Ten-year figures (in local currency) show the Netherlands grew their pension assets the most as a proportion of GDP by 51% to reach 166% followed by the UK (up 37% to 116% of GDP), the US (by 32% to 127% of GDP).

Bond allocations for the P7 markets have decreased by 9% in aggregate during the past 19 years (40% to 31%). Allocations to equities have fallen by 7% (to 42%) during the same period. Equity allocations have fallen in all of the P7 markets. Equity allocations by Japanese pension funds have decreased from 48% in 2004 to 33% in 2013 while equity allocations by UK pension funds have fallen from 67%to 44% in the same period.

While in the Netherlands equity allocations fell from 39% to 30% and Canada's allocation to equities fell from 51% to 41%. Australian pension funds have maintained the highest allocation to equities over time, reaching 51% in2014.

UK pension funds have increased their allocation to bonds during this period (from 24% to 37%) as have Japanese funds (from 44% to 57%); the only two countries in the study to have decreased their allocation to bonds during this period are Australia (from 21% to 15%) and Switzerland (from 43% to 36%).

Australia has the highest proportion of DC to DB pension assets: 85% / 15%, followed by the US: 58% / 42%. Only Australia and the US have a larger proportion of DC assets than DB assets. Japan, Canada and the Netherlands are markets dominated by DB pensions with 97%, 96% and 95% of assets respectively invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift towards DC.

The P16 refers to the 16 largest pension markets included in the study which are Australia, Brazil, Canada, France, Germany, Hong Kong, Ireland, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Switzerland, the UK and the US. The P16 accounts for around 85% of global pension assets.

The P7 refers to the 7 largest pension markets (almost 94% of total assets in the study) and excludes Brazil, France, Germany, Hong Kong, Ireland, Malaysia, Mexico, South Africa and South Korea.

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