Pensions Flock to Equities as Global Assets Surge

Liabilities are still the main issue, but pension assets are on the rise.

(January 31, 2013) — Pension fund assets in the sector’s most important nations rose 8.9% in US dollar terms last year, as these large investors significantly shifted into equities, research has shown.

The seven countries with the largest pension systems all posted asset growth over the year-long period, investment consultant Towers Watson revealed today in its annual Global Pensions Assets Survey.

The United States, United Kingdom, Australia, and Switzerland grew by 10% in local currency terms, while Canada’s assets grew slightly more at 10.3%. Assets in the Netherlands grew the most at 11.5%, while Japan’s assets grew a total of 0.5% in 2012.

In 2011, the combined growth figure had been 2.9%.

This growth was accompanied by a shift in asset allocation towards a greater equity holding in most of these nations.

Overall, the allocation to equities by global pension funds increased by six percentage points from 41% to 47% in 2012, Towers Watson said.

Chris Ford, EMEA head of investment at Towers Watson, said: “Jittery markets and heightened risk awareness continues to make asset allocation very challenging as companies and trustees balance such priorities as long-term de-risking, short-term market opportunities, rebalancing, and maintaining a strategic asset allocation mix.”

On a country-by-country basis, the largest shift occurred in the US, where overall allocations to the asset class shifted by eight percentage points from 44% to 52% over the year.

Canada, Australia, and Japan, a nation which has habitually favoured bond investment, all moved further into equities by four percentage points. Switzerland moved three percentage points’ more assets there, Towers Watson said.

The Netherlands and the UK were the only two major pension-providing nations to keep their allocation stable at 27% and 45% respectively, although both cut their allocation to fixed income in favour of alternative investments.

In the US, pension funds also cut their bond holdings by a couple of percentage points, but more drastically reduced their “other” or alternative investments by a fifth – from 25% at the end of 2011 to 20% a year later.

Ford said: “In terms of specific asset classes, we don’t think that bonds represent great value at the moment – but for those that think equities represent relatively better value, it is challenging to know what to do about it when the goal for many funds is to reduce risk overall. So many funds are buying fewer bonds than before, and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”

To access the full survey, click here.