Global pension assets on the up

• Global institutional pension fund assets bounce back in 2019, up 15% to US$46.7 trillion
• In the decade ending 2019, South Korea (12.4%), Hong Kong (9.2%) and the US (7.8%) are the fastest growing pension markets in terms of total assets
• Global defined contribution (DC) assets are estimated to represent slightly over 50% of total pension assets in the seven largest pension markets
• The last 20 years has seen a continued rise in allocations to private markets and other alternatives, from just 6% to 23%, at the expense of equities and bonds
• APAC is home to 7 of the 22 major pension markets, with Japan the largest, followed by Australia, South Korea, Malaysia, mainland China, Hong Kong and India
• APAC’s seven pension markets grew AUM by 11.6% in 2019

ASIA, 10 February 2020 – Global institutional pension fund assets in the 22 largest major markets (the “P22”) bounced back in 2019, soaring by 15% to US$46.7 trillion at year end, according to the latest figures in the Thinking Ahead Institute’s Global Pension Assets Study.

The growth recovery was driven, in part, by strong gains in equity markets during the year with Mexico (22.2%), Canada (18.9%) and the US (17.8%) leading the way. This represents a significant swing in fortunes from 2018, which saw an overall 3.3% decline in global pension assets.

The seven largest markets for pension assets (the “P7”) – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – account for 92% of the P22, marginally higher than the previous year. The US also remains the largest pension market, representing 62% of worldwide pension assets, followed by the UK and Japan with 7.4% and 7.2% respectively.

The research also shows the shift to alternative assets continues apace and marks two decades of considerable change in pension fund asset allocation globally. In 1999, just 6% of P7 pension fund assets were allocated to private markets and other alternatives, compared to nearly a quarter of assets (23%) in 2019. This shift comes largely at the expense of equities and bonds, down 16% and 1% respectively, in the period. The average P7 asset allocation is now equities 45%, bonds 29%, alternatives 23% and cash 3%.

Marisa Hall, Co-Head of the Thinking Ahead Institute said: “Besides strong growth in assets last year, there was a noticeable pick-up in the decade-long trend of funds developing stronger strategies around their people. Larger funds, particularly those above US$25 billion, continued to build larger and more sophisticated internal teams, with stronger leadership through CEO and CIO roles and greater role specialisation in certain asset classes, such as private markets. Smaller funds are continuing to outsource all or part of their CIO-type decisions and we expect this to continue.”

According to the research, total DC assets continue to grow, representing slightly over 50% of total P7 pension assets. Last year DC exceeded defined benefit (DB) assets for the first time, a culmination of ten years of faster DC assets growth than DB (8.4% vs 4.8% pa), reflecting increased member coverage and, in some markets, higher contributions.

Marisa Hall said: “The DC market has retained its newly-found position as the larger of the two, as DB assets grow at a far slower pace. But the challenge of member engagement, critical for a stronger DC system, remains an unresolved issue for many Schemes. As such, we expect this to be an area of particular focus for leading DC organisations as the next generation of plans takes shape. Advances in technology are opening up new possibilities for customisation, changing the nature of member interactions and re-setting member expectations. The future of DC is likely to be hyper-customised, with increased focus on individual participants, but many schemes need to improve their governance to fully embrace this.”

Jayne Bok, Head of Investments for Asia at Willis Towers Watson, said: “Asia Pacific (APAC)’s pension markets continue to be a hive of activity, with South Korea and Hong Kong experiencing the highest growth rates for total assets globally, and Australia ranked as the most successful pensions market worldwide. This highlights the rise in the working population and expansion of pension benefits in APAC. However, looking at 2019, growth of the seven largest APAC pension markets was slightly slower than the overall growth of the 22 largest pension markets. This is partly due to the lower allocation to equities and alternative investments within the region.”

“For pension funds in APAC to continue on this steady trajectory going forward, they will need to start embracing sustainability, ESG, stewardship and long-horizon investing. The region has lagged in this area for many years, but with sustainability and climate change becoming significant for the industry, such issues can no longer be ignored. Now is the time for APAC pension funds to act,” added Jayne.

Other highlights from the study include:

Global asset data for the P22 in 2019

• The US (62.5%) continues to be the largest market in terms of pension assets, followed by the UK and Japan with 7.4% and 7.2% respectively.
• Total pensions assets to GDP ratio was 68.8% at the end of 2019
• The Netherlands continues to have the highest ratio of pension assets to GDP (187%) followed by Australia (151%) and Switzerland (146%).
• The average ten-year compound annual growth rate (CAGR) figures (in USD) for P22 markets is 6.5%.
• Estimated five-year growth rates (in local currency) range from -0.6% per annum in France to 15.2% in India.
• The US continues to hold the largest weighting (62.5%) within the P22; while the weights of Hong Kong and South Korea marginally increased relative to the other markets in the study, over the past ten years.
• Ten-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP by 73 percentage points (pp) to reach 187%, followed by Australia (41pp to 151%), the US (41pp to 136%), Switzerland (40pp to 146%) and the UK (39pp to 126%).

Asset Allocation for the P7

• Equities allocations for the P7 markets have decreased by 16 percentage points in aggregate during the past 20 years (61% to 45%), which funded the corresponding increased allocation to alternative assets.
• Allocations to bonds remained broadly unchanged in P7 markets, down 1 percentage point to 29%.
• The home bias towards equities has fallen, on average, with the weighting down to 39.7% in 2019 from 68.6% in 1999.

DC / DB assets for P7

• DC pension assets have grown from 31% in 1999 to 50% in 2019 of total pension assets.
• Australia continued to have the highest proportion of DC to DB pension assets, with 86% of its total pension assets in DC funds.
• Japan (95%), Canada (94%), the Netherlands (94%) and the UK (82%) continue to be markets dominated by DB pension assets.

Asia Pacific highlights

• In the past decade, the market weights of Hong Kong and South Korea have increased relative to other markets, while the market weight in Australia remained the same
• The Japanese Yen was the only APAC currency to appreciate against the USD in the last five years by 1.9%
• In 2019, Australia continued to have an above average equity allocation, whereas Japan had an above average exposure to bonds

Notes to editors:

• The P22 refers to the 22 largest pension markets included in the study which are Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Spain, Switzerland, the UK and the US.
• The P7 refers to the seven largest pension markets (92% of total assets in the study): Australia, Canada, Japan, Netherlands, Switzerland, UK and US.
• All figures are rounded and 2019 figures are estimates.
• All dates refer to the calendar end of that year.

About the Thinking Ahead Institute

The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation member group made up of engaged institutional asset owners and service providers committed to mobilising capital for a sustainable future. It has over 40 members around the world and is an outgrowth of the Willis Towers Watson Investments’ Thinking Ahead Group which was set up in 2002. Learn more at www.thinkingaheadinstitute.org

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com.