Alternative assets are in, domestic equities are out, according to the latest Willis Towers Watson (WTW) annual survey of the world’s largest pension markets.
In a statement, Roger Urwin, WTW global head of investment content, said pension funds have driven the two asset allocation trends primarily as risk management strategies.
“The persistent economic uncertainty is likely to reinforce these shifts,” Urwin said in the release.
The WTW Global Pensions Assets Study 2016 found domestic shares as a proportion of the overall equity exposure in the seven biggest pension markets it surveyed had shrunk from 65 per cent in 1998 to 43 per cent as at the end of last year.
Over the 20-year period to the end of 2015 the top seven pension markets have also collectively upped their allocation to alternative assets from 5 per cent to 24 per cent, the WTW report says.
Real estate was the favoured alternative asset “and to a lesser extent hedge funds, private equity and commodities”.
“In the past decade most countries have increased their exposure to alternative assets with Canada increasing them the most (from 14% to 27%), followed by the UK (7% to 18%), Switzerland (18% to 29%), US (17% to 27%) and Japan (from 3% to 9%),” the study says.
New Zealand’s $30 billion KiwiSaver market has less 2 per cent invested in alternative assets, according to a 2015 Aon report.
The A$2 trillion plus Australian superannuation market maintained a steady exposure to alternatives over the last 10 years, reporting a 21 per cent allocation to the asset class in 2015 compared to 23 per cent five year’s previously and 19 per cent in 2010. Since 2010, the Australian pension fund industry also increased its cash weighting from 9 per cent to 17 per cent, the WTW survey shows.
Despite the trend away from home for equities, domestic bond exposure (as a proportion of total fixed income portfolios) dropped only slightly from 88.2 per cent in 1998 to 76.3 per cent at the latest count.
Canadian and US pension funds particularly favoured local bonds with the asset class making up 98 per cent and 87 per cent respectively of total fixed income allocations. Meanwhile, Australian superannuation funds have upped their exposure to local bonds by 7 per cent over the last two years, the WTW report says.
However, in aggregate the top seven pension markets in the survey – Australia, Canada, Japan, Netherlands, Switzerland, UK and the US – have reduced both bond and equity exposures as a proportion of total investments. According to the survey, allocation to bonds has fallen from 36 per cent to 29 per cent over the last 20 years with equity exposure dropping from 52 per cent in 1995 to the current 44 per cent among the seven-nation grouping.
Aside from its in-depth analysis of the seven largest pension markets, the WTW survey also collected statistics from 12 other countries including new-comers Chile, India and Spain.
In total, the 19 pension markets represented just over $35.4 trillion (or about 35 per cent of global institutional investment assets) in US dollar terms at the end of 2015, down 0.5 per cent compared to the 2014 figure, the report says.
Funds under management range from almost US$21.8 trillion for the US market to US$41 billion for Spain. Collectively, New Zealand’s KiwiSaver and traditional superannuation markets manage about $52 billion (or US$34 billion based on latest exchange rates).
The survey also documents the inexorable trend to defined contribution (DC) regimes globally as defined benefit (DB) funds decline. The DC/DB balance is poised at 52/48 per cent in the latest report compared to 60/40 per cent just 10 years ago.
For the first time, too, the WTW report includes an estimate of the “carbon emissions of the aggregate pension assets” covered in its survey. The study says assets owned by the 19 pension fund markets spat out about 3.1 billion tonnes of carbon during 2015.
Other findings for the full set of WTW global pension data include:
- The 10-year average growth rate of global pension assets (in local currency) is 7%
- The largest pension markets are the US, the UK and Japan with 62%, 9% and 8% of total pension assets, respectively
- All markets in the study have positive 10-year compound annual growth rate (CAGR) figures (in local currency), with the exception of Japan
- In terms of 10-year CAGR figures (in local currency terms), Chile has the highest growth rate of 18% followed by Mexico (15%), South Africa (11%), Australia (9%), Hong Kong (9%), Brazil (8%), Canada (8%), Netherlands (7%) and the UK (7%). The lowest are Japan (-0.2%), Switzerland (2%) and France (2%)
- 10-year figures (in local currency) show the Netherlands grew their pension assets the most as a proportion of GDP by 75% to reach 184% followed by the Chile (by 57% to 118% of GDP), the UK (by 32% to 112% of GDP) and Australia (by -36% to 120% of GDP).