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U.S., Global Pension Fund Assets Reach New Highs, Towers Watson Study Finds

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Assets at U.S. institutional pension funds increased 9% in 2014, to a record $22.1 trillion, according to Towers Watson’s (NYSE, NASDAQ: TW) annual Global Pension Assets Study, released today. Globally, institutional pension fund assets in the 16 major markets grew by over 6% during 2014 (compared to around 10% in 2013) to reach a new high of $36 trillion, according to the research. The growth is a continuation of a trend that started in 2009, when assets grew 18%, in sharp contrast to a 22% decline during 2008, when assets fell to around $20 trillion. Global pension fund assets have now grown at an average annual rate of 6% since 2004.

The Towers Watson study also shows that defined contribution (DC) assets grew rapidly for the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%, versus a rate of over 4% for defined benefit (DB) assets. As a result, DC plan assets have grown from 38% of all pension assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years. In the U.S., DC assets continued to climb steadily and now represent 58% of all assets, up from 52% in 2004 and 55% in 2009.

“The continuing shift to DC plans means they are becoming the world’s most prevalent retirement savings model,” said Steve Carlson, head of Towers Watson’s Americas Investment practice. “This shift brings a transfer of risk and new tension to the balance between ownership and control, which will test governments and pension industries around the world.”

According to the study, pension assets now amount to around 84% of the global gross domestic product (GDP), substantially higher than the 54% recorded in 2008. In the U.S., the ratio of pension assets to GDP increased from 95% in 2004 to 127% in 2014.

“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 funded positions. However, in the U.S., pension plans are in a better position, given the contribution flexibility,” said Carlson.

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 10 years, U.S. 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 U.K. exposure to domestic equities has more than halved, to 36%, since 1998. The research shows Canadian and U.S. 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.

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, according to the research. 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 U.S. (from 16% to 29%), Switzerland (from 16% to 28%), Canada (from 13% to 22%) and the U.K. (from 7% to 15%).

Other Highlights From the Report

Global asset data for the P16 in 2014:

  • The 10-year average growth rate of global pension assets (in local currency) is just over 8%.
  • The largest pension markets are the U.S., the U.K. and Japan, with 61%, 9% and 8% of the total pension assets, respectively.
  • All markets in the study have positive 10-year CAGR figures (in local currency).
  • In terms of 10-year CAGR figures (in local currency), Mexico has the highest growth rate (over 19%), followed by South Africa (13%), Australia (11%), Hong Kong (10%), Brazil (10%) and the U.K. (9%). The lowest figures are found in Japan (1%), France (3%) and Switzerland (3%).
  • 10-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP (by 51%, to reach 166%), followed by the U.K. (up 37%, to 116% of GDP) and the U.S. (up 32%, to 127% of GDP).

Asset allocation for the P7:

  • Bond allocations for the P7 markets have decreased by nine percentage points in aggregate during the past 19 years (from 40% to 31%). Allocations to equities have fallen by 7% (to 42%) during the same period.
  • Equity allocations have fallen in all of the P7 markets. Equity allocations by Japanese pension funds have decreased from 48% in 2004 to 33% in 2014, while equity allocations by U.K. pension funds have fallen from 67% to 44% in the same period. In the Netherlands, equity allocations fell from 39% to 30%, and Canada’s allocation to equities fell from 51% to 41%. Australian pension funds have maintained the highest allocation to equities over time, reaching 51% in 2014.
  • U.K. pension funds have increased their allocation to bonds during this period (from 24% to 37%), as have Japanese funds (from 44% to 57%). The only two countries in the study to have decreased their allocation to bonds during this period are Australia (from 21% to 15%) and Switzerland (from 43% to 36%).

DC/DB assets for P7:

  • Australia has the highest proportion of DC to DB pension assets, at 85%:15%, followed by the U.S., at 58%:42%. Only Australia and the U.S. 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 toward DC.

Notes to editors:

  • The P16 refers to the 16 largest pension markets included in the study, which are Australia, Brazil, Canada, France, Germany, Hong Kong, Ireland, Japan, Malaysia, Mexico, the Netherlands, South Africa, South Korea, Switzerland, the U.K. and the U.S. The P16 accounts for approximately 85% of global pension assets.
  • The P7 refers to the seven largest pension markets (almost 94% of the total assets in this study) and excludes Brazil, France, Germany, Hong Kong, Ireland, Malaysia, Mexico, South Africa and South Korea.
  • All figures are rounded, and 2014 figures are estimates.
  • All dates refer to the calendar end of that year.

Towers Watson Investment

Towers Watson’s Investment business is focused on creating financial value for institutional investors through its expertise in risk assessment, strategic asset allocation, fiduciary management and investment manager selection. It has over 800 associates worldwide, assets under advisory of over US$2.2 trillion and over US$75 billion 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. With 15,000 associates around the world, the company offers consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management. Learn more at towerswatson.com.

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