HONG KONG, February 16, 2023 – After more than a decade of uninterrupted growth, last year global pension assets recorded their largest fall since the Global Financial Crisis of 2008, according to the Thinking Ahead Institute’s latest Global Pension Assets Study. It shows that global pension assets now stand at USD 47.9 trillion, a fall of 16.7% in a year driven largely by a correction in both fixed income and equity markets.
The US remains the largest pension market followed, at a significant distance, by Japan and Canada. Together, these three markets account for over 76% of pension assets in the largest 22 pensions markets (P22). In Asia-Pacific, Australia was the second largest pension market behind Japan, followed by South Korea and China.
Despite the considerable decline in global pension assets, Asia-Pacific countries remain the fastest growing pension markets in USD terms over the last ten years, with China (17.5%), South Korea (9.0%), India (8.2%) and Hong Kong (6.4%) taking the top four spots amongst the ‘P22.’ Asia-Pacific markets’ asset weightages across the ‘P22’ have also increased, with South Korea growing from 1.2% of total pension assets in 2012 to 1.9% in 2022, China from 0.2% to 0.8%, India from 0.2% to 0.4% and Hong Kong from 0.3% to 0.4%.
Since 2002, overall equity allocations have shrunk from 50% to 42% and similarly the allocation to bonds has decreased from 38% to 32%. Allocation to other assets (real estate and other alternatives) has increased from 9% in 2002 to an estimated 23% at the end of 2022. Traditionally the US and Australia have had higher allocations to equities than the rest of the largest seven pensions markets (P7), while Japan, Netherlands and the UK have had higher allocations to bonds.
In many regions around the world, defined benefit (DB) pensions continued to diminish in the continuing shift to defined contribution (DC) plans. In the last 20 years, global DC assets have grown 7.2% per annum, compared to 4.4% per annum growth rate for DB assets.
Jayne Bok, Head of Investments Asia at WTW, said: “The past year was a challenging year by all accounts. We saw the end of low volatility, rising inflation, tightening policy, a global growth slow-down and a break in traditional asset class relationships. Most of our client portfolios experienced this in real-time with double digit drawdowns as shown in the GPAS findings. Still, after a period of exuberant valuations, it was gratifying to see diversification pay-off for asset owners who adopted greater allocations to alternatives and a more flexible approach to capital allocation – a clear advantage in times of stress.
Asia’s pension funds are still heavily exposed to traditional asset classes, but I believe that today’s turbulent economic environment will prompt many to review allocations with an eye towards enhancing portfolio resilience. I fully expect Asia to build up exposure to alternatives and this will play an important role in future portfolios. I’m also encouraged to see more and more Asian pension funds integrate ESG into their thinking. There is an increasing weight of capital in Asia that is aligning to what we refer to as ‘3D investing’, going beyond the traditional risk-return paradigm to consider impact, and in a way that is visible and relevant to Asia.”
“Last year we experienced, to an extent, a global polycrisis where various risks combined, were amplified as a result, and manifested in significant asset falls..”
Marisa Hall | Thinking Ahead Institute
Marisa Hall, head of the Thinking Ahead Institute said: “Last year we experienced, to an extent, a global polycrisis where various risks combined, were amplified as a result, and manifested in significant asset falls. It is our view that these systemic risks will increase in future and will emanate predominantly from environmental, societal and geo-political sources”.
“While many pension funds are focused on the long term, this situation presents short-term challenges which cannot be ignored. The main challenge is that accurate pricing of these risks is near impossible, as they have high uncertainty and low tractability, but their impact is likely to be broad and significant and will test organisational resilience”.
“Our work with investors points to transition pathways focussed on cleaner energy, fairer societies and greater accountability. As this landscape evolves, pension organisations will need to adjust their strategies and use adaptive capital to navigate these changes and build in future resilience.”
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 asset managers committed to mobilising capital for a sustainable future. It has 50 members around the world and is an outgrowth of the WTW Investments’ Thinking Ahead Group which was set up in 2002. Learn more at Thinking Ahead Institute.
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