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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 6% on average per annum (in USD) since 2004.
The research shows that defined contribution (DC) assets grew rapidly for the ten-year period to
2014, with a compound annual growth rate (CAGR) of 7%, against a rate of over 4% for defined
benefit (DB) assets. As a result DC pension assets have grown from 38% of all pensions assets in
2004 to 47% in 2014 and are expected to overtake DB assets in the next few years.
Thierry de la Noue, Senior Investment Consultant at Towers Watson France, said: “The inexorable shift to
DC, which we believe will soon constitute the majority of global pension fund assets, means it is
becoming the dominant global pensions model. This brings with it the transfer of risk and a new tension in
the balance of ownership and control, which will test governments and pension industries around the
world. These billions of new pension members have high and immediate expectations in a world of low
returns and in many cases where the benefits of pooling are not fully exploited. This pressure is likely to
accelerate the emergence of a more effective “value chain”, where expense on various activities has a
better value proposition than exists today. The use of passive approaches and smart betas in DC will lead
to fee compression. So far that that fee compression has been small but over time it is likely to be a large
disruptive force.”
According to the study, pension assets now amount to around 84% of global Gross Domestic Product
(GDP), substantially higher than the 54% recorded in 2008.
Thierry de la Noue said: “While there has been a significant improvement in various pension balance
sheets around the world since the financial crisis, many DB pension funds are still in very weak solvency
positions. With global pension assets at only 84% of global GDP, the pensions industry gets quite poor
marks for providing good value for the worker and pensioner populations. The acid test for national
pension systems should be to get assets to at least 150% of GDP. If that were combined with an improving recognition of good governance as a return driver and sustainable investing as genuinely value
adding, it would put the pensions world in much better shape.”
According to the research, there is a clear sign of reduced home bias in equities, as the weight of
domestic equities in pension portfolios fell, on average, from 65% in 1998 to 43% in 2014. During the past
ten years US pension plans have maintained the highest bias to domestic equities (67% in 2014), having
also increased domestic equity bias during the past three years. Canadian and Swiss funds remain the
markets with the lowest allocation to domestic equities (33% and 34% respectively in 2014) while UK
exposure to domestic equities has more than halved, to 36%, since 1998. The research shows Canadian
and US funds have retained a very strong home bias in fixed income investment since the research
began (98% and 91% respectively in 2014), while Australian and Swiss funds have reduced exposure to
domestic bonds significantly since 1998: down by 31% and 17% respectively during this period.
According to the research allocations to alternative assets – especially real estate and to a lesser extent
hedge funds, private equity and commodities – in the larger markets have grown from 5% to 25% since
1995. In the past decade most countries have increased their exposure to alternative assets with
Australia increasing them the most (from 10% to 26%), followed by the US (16% to 29%), Switzerland
(16% to 28%), Canada (13% to 22%) and the UK (from 7% to 15%).
Thierry de la Noue said: “This shift away from domestic equities is one indication of an increased focus on
risk management and there are others such as diversification of assets in portfolios, which is also
increasing. However from working with an increasing number of CIOs at pension funds, this focus on risk
is producing two very different groups: those where the appetite for risk is being trimmed and those
needing more risk to get them out of their deficit. As a result, the pensions world has to be considered at
an increasingly contextual level to understand its present state and make projections about its future.”
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