Global pension funds raked in a record US$4.8 trillion during 2017 pushing total assets under management to an all-time high of US$41.3 trillion, according to the 20th Willis Towers Watson (WTW) annual survey of the sector.
On average the pension assets managed by the 22 jurisdictions covered in the WTW report – now housed under the group’s associated Thinking Ahead Institute (TAI) – grew 13.1 per cent last year (in US dollar terms) compared to 16.4 per cent for a proxy benchmark 60/40 mix of global equities and bonds.
While the study shows global pension fund growth, including net flows, “closely matched” equity and bond markets, average returns in the sector lagged the 60/40 benchmark over all periods reported bar the 20-year stretch where funds outperformed by 0.2 per cent.
“Pension asset growth includes net cash flows –contributions in and benefits out,” the report says. “Most calculations suggest that this amount has been quite small relative to the size of assets and market growth.”
Over the 20-year period pension funds have become increasingly diversified, the WTW study says, with a big shift to ‘alternatives’ and away from home-based assets.
In a statement WTW global head of investment content, Roger Unwin, said the “risk management and diversification” remain top-of-mind for pension funds “as epitomised by the inexorable rise of private assets over the lifetime of this study, rising from as little as 4% of allocations in 1997, to around 20% today”.
“As our understanding of these asset classes has increased, so has the sophistication of strategies in allowing funds to go beyond traditional means of diversification,” Unwin said.
Overall ‘home bias’ towards equities among pension funds has fallen from 68.7 per cent in the inaugural WTW study to just over 41 per cent in the latest report.
“In the past ten years, the US market has maintained the largest allocation to domestic equities while Canada, Switzerland and the UK have had the lowest,” WTW says.
Australia, the fastest-growing pension fund market over the previous two decades (12.1 per cent annualised in US dollar terms), remains just behind the US for favouring local shares with about 65 per cent of its total equity exposure in domestic assets (compared to almost 80 per cent at its peak in 2003).
Defined benefit (DB) schemes remain the norm in Europe, Japan and Canada but defined contribution (DC) funds now account for about half of all global pension fund assets compared to just 33 per cent in 1997, the WTW report shows.
As at the end of 2017 WTW estimates pension schemes would control about US$45 trillion globally, exactly on par with managed funds (including exchange-traded funds), following by insurance funds (US$33 trillion), sovereign wealth funds (US$7 trillion), and endowments/foundations (US$1 trillion).
Despite the generally rosy picture for pension funds Unwin said schemes faced a number of significant challenges including “the sector regulation; changes in the available investment universe; new investment methods; and how to measure progress and success of a pension plan”.
“There is also the developing issue of true integration of ESG, stewardship and sustainability within overarching investment strategies,” he said in the statement.
“These funds have given more attention to sustainability issues over time and have become more conscious of the footprints they leave on the world. Looking ahead, it seems that the shift in their style of fiduciary capitalism will act as a positive stabilising influence on the world’s financial system.”