LONDON, Wednesday 5 February 2014 – Global institutional pension fund assets in the 13 major markets grew by 9.5% during 2013 (compared to 6.9% in 2012)  to reach a new high of almost US$32 trillion, according to Towers Watson’s Global Pension Assets Study released today. The growth is the continuation of a trend which started in 2009 when assets grew 18%, and in sharp contrast to a 22% fall during 2008 when assets fell to around US$20 trillion. Global pension fund assets have now grown at over 6.7% on average per annum (in USD) since 2003.

The study reveals that the growth in assets helped to strengthen pension fund balance sheets1 during 2013. Furthermore, the ratio of global assets to global GDP is at its highest level since the research began. According to the study, pension assets now amount to around 83% of global GDP, a large rise from the 76% recorded in 2012 and substantially higher than the 57% recorded in 2008.

Carl Hess, global head of investment at Towers Watson, said: “During 2013 equities enjoyed their best calendar year of risk-adjusted return since the financial crisis and as a result pension funds in most markets are in the best shape they have been for many years. The global economic recovery continued to gain momentum throughout 2013, thanks to the absence of major negative events and a stream of positive economic news and after such a long period of financial retrenchment and uncertainty, this is all genuinely encouraging. Generally, pension funds are now implementing investment strategies that are more flexible and adaptable and which contain a broader view of risk so as to make greater allowance for the sort of extreme economic and market volatility they have experienced during the past five years. This is just as well because the global economic recovery – and the implied normalisation of market conditions - is by no means guaranteed.”

Other highlights from the report include:

Global asset data for the P13 in 2013

  • The ten-year average growth rate of global pension assets (in local currency) is just under 8%
  • The largest pension markets are the US, the UK and Japan with 59%, 10% and 10% of total pension assets, respectively
  • All markets in the study have positive ten-year compound annual growth rate (CAGR) figures (in local currency)
  • In terms of ten-year CAGR figures (in local currency terms), South Africa has the highest growth rate of over 14% followed by Hong Kong (12%) and Australia (12%) and the UK (11%) and Brazil (11%). The lowest are Japan (1%), France (1%) and Switzerland (5%)
  • Ten-year figures (in local currency) show the UK grew their pension assets the most as a proportion of GDP by 64% to reach 131% followed by the Netherlands (up 56% to 170% of GDP), the US (by 27% to 113% of GDP).
  • During this time Japan’s ratio of pension assets to GDP has fallen by 3% to 65% of GDP and Brazil’s and France’s ratios each fell by 2% to 13% and 6% of GDP respectively.

Asset Allocation for the P7

  • Bond allocations for the P7 markets have decreased by 12% in aggregate during the past 19 years (40% to 28%). Allocations to equities have fallen by 3% (to 52%) during the same period.
  • Equity allocations by Japanese pension funds have risen from 22% in 2003 to 40% in 2013 while equity allocations by UK pension funds have fallen from 65% to 50% in the same period. While in the Netherlands equity allocations fell from 40% to 35% and Canada’s allocation to equities fell from 55% to 48%. US and Australian pension funds have maintained the highest allocation to equities over time, reaching 57% and 54% in 2013 respectively.  
  • Japanese pension funds still have the highest allocation to bonds (51%) but this represents a significant reduction since 2003 when 71% of their assets were in bonds. Dutch pension funds have increased their allocation to bonds during this period (from 45% to 50%) as have UK funds (31% to 33%); the only two countries in the study to have done so.
  • 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 18% since 1995
  • In the past decade most countries have increased their exposure to alternative assets with Australia increasing them the most (from 8% to 25%), followed by Canada (8% to 21%), the UK (from 3% to 14%). Allocations to alternatives in the Netherlands and Switzerland have remained constant during the same period.

Carl Hess said: “Since our research began in 1995 there is a clear sign of reduced home bias in equities, with the average weight of domestic equities in pension fund portfolios falling from around 65% in 1998 to just over 44% in 2013.  Perhaps surprisingly, during the past ten years US pension schemes remain the market with the highest bias to domestic equities, while Canadian funds have had the lowest allocation to domestic equities. Regarding home bias in fixed income investment, the average allocation to domestic bonds as a percentage of total bonds has remained high since the inception of this research when it was over 88%; last year it was around 80%.”

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

  • During the ten-year period from 2003 to 2013, the CAGR of DC assets was 9% against a rate of 5% for DB assets
  • DC pension assets have grown from 38% in 2003 to 47% in 2013
  • Australia has the highest proportion of DC to DB pension assets: 84% / 16% compared to 83% / 17% in 2012. Only Australia and the US have a larger proportion of DC assets than DB assets.
  • Japan, Canada and the Netherlands are markets dominated by DB pensions with 97%, 96% and 95% of assets respectively invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift towards DC.

Carl Hess said: “The recovery of most pensions systems globally gives governments, plan sponsors and fiduciaries an important breathing space to implement nascent structures for delivering good DC-type pensions. In many countries, governments and pension industries have taken bold steps to provide for those persuaded to save, however the pressure is on to ensure they are enrolled into well-designed, well-managed schemes. New pensions members’ expectations are high and immediate but in order to meet these there should be no let-up in the pressure to achieve the three most important goals for delivering good DC plans: good fund-level governance, scale and alignment of interests.”

Public vs. private sector pensions in 2012 (no estimates available for 2013)

  • 66% of pension assets of the P7 group are held by the private sector and 34% by the public sector
  • In the UK and Australia the private sector holds the biggest portion of pension assets, accounting for 88% and 84% respectively of total assets in 2012
  • Japan and Canada are the only two markets where the public sector holds more pension assets than the private sector, holding 71% and 55% of total assets respectively.

1 Measured by asset values over liability values using sovereign bond yields to discount liabilities.

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 (almost 96% of total assets in the study) and excludes Brazil, Germany, France, Ireland, Hong Kong and South Africa
  • All figures are rounded and 2013 figures are estimates
  • All dates refer to the calendar end of that year.

Towers Watson Investment

Towers Watson Investment is focused on creating financial value for the world’s leading institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. Towers Watson’s Investment business has over 750 associates worldwide, assets under advisory of over US$2 trillion and around US$60bn of assets under management.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management.  Towers Watson has more than 14,000 associates around the world.