According to the Thinking Ahead Institute’s Global Pension Assets Study, global institutional pension fund assets in the 22 largest pension markets grew to a titanic $41.3 trillion at the end of 2017.
The astonishing figure is the highest since 1997, the year of the inaugural report.
According to the report, pension fund assets experienced a single-year growth of $4.8 trillion in 2017, up 13%. Global consulting firm Willis Towers Watson, which the Institute is an outgrowth of the firm’s Thinking Ahead Group, attributes the gains to massive market returns.
Over the 20-year period, pension fund assets have seen a steady growth of 6.2% per year, similar to global public market equity and bond returns in the same timeframe. The study also found that defined benefit (DB) and defined contribution (DC) plans, which now account for nearly half of the total assets of the seven–largest pension markets in the world, have seen annual increases of 4.5% and 7.9%, respectively, during the 20-year duration.
“While the short-term figures are positive, these are due to unusually high market returns,” Steve Carlson, head of North America Investments, Willis Towers Watson, said in a statement. “Looking back at 20 years of progress makes for an encouraging read. In particular, the improving position of pension assets as a proportion of GDP and the evolution of pension fund governance has risen up trustees’ agendas and is certainly a lot stronger as a result.”
Spearheaded by the US, the UK, and Japan, the top 22 pension markets’ total assets–to–GDP ratio were 67% at the end of 2017, and, although the US remains the highest-weighted group at 61%, Brazil, Canada, Finland, France, Germany, Ireland, Japan, the Netherlands, South Africa, Spain, and the UK have all seen their total weighted assets decrease relative to the other markets researched by the Institute.
As for the highest ratio of pension assets to GDP, the Netherlands (194%), Australia (138%), and Switzerland (133%)are king.
As for allocation, the top seven pension markets have reduced their equities and bond allocations by 11% (from 57% equities to 46%) and 10% (from 35% to 27% bonds) since 1997.
Over the 10-year period, the US has held the largest domestic equity allocation, while the three markets with the largest bond allocations over the same duration were the Netherlands (43% to 53%), Japan (50% to 56%), and the UK (30% to 35%).
“Risk management and diversification continue to be a significant focus for asset owners, epitomized by the rise of private assets over the lifetime of this study, rising from 4% of allocations in 1997 to around 20% today,” Carlson said, who mentioned the growing trend of ESG [environmental, social, and governance]-based strategies going forward. “As our understanding of these asset classes has increased, so have the strategies in allowing funds to go beyond traditional means of diversification. That said, the challenges faced by pension funds are complex. They must consider regulation, changes in the available investment universe, new investment methods, and how to measure progress and success of a pension plan. There is also the developing issue of true integration of ESG, stewardship, and sustainability within overarching investment strategies.”