The US Owns Most of the World’s Retirement Assets

How one region’s pension domination sets the investing agenda for the rest of the globe.

A worldwide drop in pension assets in 2018 sees defined contribution (DC) funds total more than their defined benefit (DB) counterparts, a first for the pension world.

Global retirement assets fell by 3.3% at year-end to $40.1 trillion from $41.5 trillion in 2017, according to a study by Willis Towers Watson’s Thinking Ahead Institute. Much of this -5.7% annual return (benchmarked against a traditional 60/40 investment portfolio) was in relation to the rough patch equities hit in Q4. The research was conducted around the top 22 pension markets in the world, known as the P22.

DC plans, which usually offer 401(k) options and other enrollment-based investing options in regard to their traditional DB counterparts, take up more than 50% of total assets in the largest seven markets.

This newfound phenomenon is due to several factors, the main being where the most DC money lies.

The top seven markets account for 91% of the P22 (Australia, Canada, Japan, the Netherlands, Switzerland, the US, and the UK), but in that “P7” Group, there is but one king.

That title goes to the US, which lists a whopping 61.5% of worldwide retirement assets. This dwarfs Japan (7.7%) and the UK (7.1%), the number two and three slots. Since America holds the most assets, it also affects their breakdown.

That includes defined contributions, which represents 62% of the nation’s pension assets. Since the DC option is cheaper than maintaining defined benefit liabilities, which grow as they are paid out to each new retiree, DC has become increasingly popular for companies. In 2018, defined contribution assets grew 8.9% while defined benefits only increased by 4.6%, according to the survey.

“When pension plans are considered the be-all and end-all of retirement living, the US was booming in population [and] booming in industry,” John Delaney, a portfolio manager at Willis Towers Watson, told CIO. 

He said if you compare the size and pension boom of the US with that of smaller countries such as the UK and Japan, you’ll see the US being “fairly outsized in terms of the assets within the defined benefit defined/contribution space that make up the pension plan assets.” This is because the other countries in the P22 didn’t see that pension boom at the same time as America.

The average asset mix for the P22 is 40% equities, 31% bonds, 26% in other assets, such as private equity, real estate, and hedge funds. Cash takes up the last 3%.  

For equities, Australia and the US are the top shareholders in the bunch, allocating 47% and 43% of their portfolios to the space. The UK, the Netherlands, and Japan are more inclined to bonds, at 52%, 53%, and 58%. Switzerland is neutral, as usual, having a mostly even mix of stocks, bonds, and alts.

That said, stocks are not as hot as they used to be. Thinking Ahead marked a 20 percentage point drop in equities over a 20-year period (from 60% to the current 40%), which has been almost totally replaced by a 19 percentage point shift to alternatives.

“I think largely what you have is you’ve seen plans in particular have a pretty good run in their recovery from the global financial crisis in equities and bonds,” Delaney said. “What we haven’t seen necessarily, especially in the corporate world, is improving their funding levels a ton despite their rock star returns in equities and bonds.”

He noted that investors are trying to essentially take profits from high-performing spaces and reallocate to others (namely, alts) that are more of a “potential source for returns more so than equities or bonds right now given where valuations are.”

Bonds, however, have gotten the “if it ain’t broke, don’t fix it” treatment from the P7, remaining a consistent 31% allocation for the past 20 years.

“You’re not getting the yield that you need on those investments (bonds) to earn enough return to reach your benefit payment needs, your outflows that you need, or [to] improve your funding levels,” he said. “They’re looking to alternatives as an additional source for return for lack of a better word.”

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