Strong Dollar and Superannuation Guarantee Drive Strong Growth in Australian Pension Assets

Sydney, 31 January 2012 – Australian pension assets are among the developed world’s fastest growing, with an annual growth rate of 17%, measured in US dollars, over the past ten years according to the Towers Watson Global Pension Assets Study. In 2011, they totalled US$1.3 trillion, the equivalent of 96% of Australia's GDP.

The growth has been propelled by the strong Australian dollar, our mandatory Superannuation Guarantee system, and our relatively high allocation to growth assets such as equities. Australian funds continue to have the highest allocation to equities at 50%.

Global institutional pension fund assets in the 13 major markets grew on average by 4% during 2011 to reach a new high of US$28 trillion, up $2 trillion from 2010. Despite the growth in assets, pension fund balance sheets weakened globally during 2011, with the ratio of global assets to liabilities well down from the peak achieved in 1999. According to the study, pension assets now amount to 72% of global GDP. While lower than in 2010 (76%) this is substantially higher than the 61% recorded in 2008.

Graeme Miller, Director of Investment Services, Australia for Towers Watson said: “Governments and corporate sponsors of defined benefit (DB) funds throughout the developed world continue to face considerable challenges in dealing with DB deficits. By contrast, Australia’s high allocation towards DC funds means that our corporate and government balance sheets have not been impacted to the same extent as other countries.”

In Australia, the impact of poor asset returns and falling bond yields have generally been passed from corporate and government balance sheets to individuals. This trend started in Australia with the inception of the Superannuation Guarantee in 1992, and now other countries and organisations around the world are following suit.

Graeme Miller said: “In case investors needed any reminding, the last six months of 2011 have driven home the need to have investment strategies that are flexible and adaptable and which contain a broader view of risk. This approach makes greater allowance for extreme events, which are occurring more frequently, while accommodating the softer elements of risk, such as credit and liquidity. The past few years have focused attention on the multi-faceted nature of risk within our increasingly precarious financial systems.

“At the same time, risk management processes have evolved somewhat to factor in more qualitative measures. However, there is still some way to go before the appropriate measurement and management of risk is firmly embedded in the governance structures of most pension funds.”

Other highlights from the report include:

Global asset data for the P13 in 2011

• The ten-year average growth rate of global pension assets (in local currency) is over 6% per annum
• The US, Japan and the UK remain the largest pension markets in the world, accounting for 59%, 12% and 9% respectively of total pension fund assets globally
• All markets in the study, except Japan, have positive ten-year compound annual growth rate (CAGR) figures (in local currency)
• In terms of ten-year CAGR figures (in local currency terms), Brazil has the highest growth of 14% followed by South Africa (13%), Hong Kong (10%) and Australia (9%). The lowest are Japan (-1%), France (1%), Switzerland (4%) and Ireland (4%)
• Ten-year figures (in local currency) show the UK has grown its pension assets the most as a proportion of GDP (by 30% to be 101% of GDP), followed by Australia (up 24% to 96% of GDP), the Netherlands (up 23% to 133% of GDP), Hong Kong (up 15% to 34% of GDP) and the US (by 12% to 107% of GDP). During this time Japan's ratio of pension assets to GDP has fallen by 1% to 55% of GDP.

Asset Allocation for the P7

• Bond allocations for the P7 markets have decreased by 3% in aggregate during the past 16 years (40% to 37%). Australia has the lowest bond allocation of the 7 largest pension markets, perhaps reflecting the fact that Australia has the highest proportion of DC benefits in the survey. Allocations to equities have fallen by 8% (to 41%) during the same period, although much of this fall (7%) occurred in 2011.
• Equity allocations in the UK have fallen from 67% in 2001 to 45% in 2011 (falling 10% in 2011 alone); similarly in the US allocations have fallen from 65% to 44% during the same period. Australia maintains the highest allocation to equities at 50%, while Japan has the highest allocation to bonds of 59%
• Allocations to other (alternative) assets, especially real estate and to a lesser extent hedge funds, private equity and commodities, for the P7 markets have grown from 5% to 20% since 1995
• In the past decade most countries have increased their exposure to alternative assets with the US increasing them the most (from 5% to 25%), followed by Switzerland (9% to 28%), Netherlands (1% to 14%), Australia (14% to 24%) and Canada (10% to 20%).

Defined Benefit (DB) and Defined Contribution (DC) for the P7

• During the ten-year period from 2001 to 2011, the CAGR of DC assets was 8% against a rate of 5% for DB assets
• DC assets now comprise 43% of global pension assets compared with 41% in 2005 and 38% in 2001
• Australia has the highest proportion of DC to DB pension assets, 81%:19%
• The markets that have a larger proportion of DC assets than DB assets are the US, Australia and Switzerland while Japan and Canada are close to 100% DB. The Netherlands, historically only DB, is now showing signs of a shift towards DC, having grown these assets by 6% in the past five years to reach 7% of total assets.

Public vs. private sector pensions in 2011

• 65% of pension assets of the P7 group are held by the private sector and 35% by the public sector
• In the UK and Australia, the private sector holds more than 80% of pension assets with 88% and 85% of total assets respectively
• Canada and Japan are the only two countries where the public sector holds more pension assets than the private sector, holding 61% and 71% of total assets respectively.

Notes to editors

• The P13 refers to the 13 largest pension markets included in the study which are Australia, Canada, Brazil, France, Germany, Hong Kong, Ireland, Japan, Netherlands, South Africa, Switzerland, the UK and the US. The P13 accounts for more than 85% of global pension assets
• The P7 refers to the 7 largest pension markets (over 95% of total assets in the study) and excludes Brazil, Germany, France, Ireland, Hong Kong and South Africa
• All figures are rounded and 2011 figures are estimates
• All dates refer to the calendar end of that year.

Table 1 - Pension assets for the Top 13 markets, 2011

Country	Assets	Rank	%GDP	Growth Rate per annum over 10 years (in USD)
US4	16,080	1	107%	5.20%
Japan	3,363	2	55%	4.70%
UK3	2,394	3	101%	8.50%
Canada1	1,303	4	78%	10.50%
Australia	1,301	5	96%	17.00%
Netherlands	1,046	6	133%	9.20%
Switzerland2	693	7	115%	9.60%
Germany	468	8	14%	9.80%
Brazil	321	9	15%	16.30%
South Africa	227	10	62%	16.90%
France	129	11	5%	4.70%
Ireland	101	12	50%	8.50%
Hong Kong	84	13	34%	10.30%
Total	27,509		72%	6.20%

¹ Brazil Pension Assets only include those from closed entities
² Excludes RRSP
³ Only includes total of autonomous pension funds
⁴ Excludes Personal and Stakeholder DC assets
⁵ Includes IRAs

Table 2 - Australian superannuation fund asset allocation

Asset Class	2011 (%)	2006 (%)
Equities	50	56
Bonds	18	17
Other (eg infrastructure, real estate, hedge funds, private equity etc)	24	20
Cash	8	7

Source: Global Pension Asset Study 2012, Towers Watson

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