Total assets in funded and private pension plans climbed to a record $38 trillion at the end of 2016, approximately two-thirds of which were held in the US, according to a new report from the Organization for Economic Co-operation and Development (OECD).
“Recent years have witnessed intense pension reform efforts in countries around the globe, often involving an increased use of funded pension programs managed by the private sector,” said the OECD. “These funded arrangements are likely to play an increasingly important role in delivering retirement income in many countries and privately managed pension assets will play an increasing role in financial markets.”
In its annual “Pension Markets in Focus” report, which covers 85 countries, the OECD found that investment losses resulting from the financial crisis have been recouped in almost all reporting OECD countries.
“Funded and private pension arrangements continued to expand in countries such as Australia, Canada, Denmark, and the Netherlands where pension assets exceeded the size of the GDP,” said the report. “This reflects a trend which has seen pension assets grow faster than GDP in most countries over the last decade.”
The OECD said this trend is most pronounced in countries with large private pension markets.
Pension providers in 28 of the 31 reporting OECD countries reported positive real investment rates of return, net of investment expenses in 2016, as did 25 of the 32 reporting non-OECD jurisdictions. These rates of investment return were above 2% on average both inside and outside the OECD area. Annual returns were also positive over the last decade in most countries, with the highest average annual real investment rates of return (net of investment expenses) reported in the Dominican Republic (6.3%), Colombia (5.8%), and Slovenia (5.2%).
However, it also said that a pervasive low-interest rate environment continues to pressure pension providers through lower yields on the fixed-income portion of their portfolio investments, “which may affect their ability to maintain promises to plan members,” said the report. The OECD warned that as a result of this pressure, pension providers could feel compelled to increase their exposure to riskier investments to achieve higher returns.
The report also focused on foreign investments by pension providers, analyzing the extent to which pension providers exploit diversification opportunities through foreign investment, which geographical areas pension assets are invested in, and how these investments are channeled.
The OECD said foreign investments are concentrated in a few geographical areas, and that pension providers’ overseas investments are mainly directed toward certain regions or neighboring countries, which it said suggests a potential regional bias.
“These biases could be due to the additional risks that investing abroad entails,” such as “foreign currency or political risks, the costs of hedging those risks and building expertise in foreign markets, and/or by regulatory barriers that could prevent investment abroad.”
According to the report, while some non-OECD countries still prevent pension providers from investing abroad, there is a general tendency toward lifting restrictions, increasing ceilings, and expanding the list of countries where their pension providers can invest.
“Such moves are in line with the OECD Codes of Liberalization promoting open access to markets for well-diversified investment portfolios,” said the report.