Global pension funds have ratcheted up exposure to alternatives while developing more nuanced strategies around the previous catch-all asset designation.
According to the just-published Thinking Ahead Institute (TAI) survey of the sector, the largest global pension investors increased allocations to alternative assets from 13 per cent in 2004 to about 20 per cent by the end of last year.
The jump in alternatives has come largely at the expense of equities with aggregate pension fund share holdings captured in the TAI study falling to 45 per cent in 2024 compared to 57 per cent 20 years’ previously.
“On the other hand, allocation to bonds increased from 29% to an estimated 33%,” the report says. “… Allocation to cash instruments remained stable at 2%.”
Jessica Gao, TAI director, said the pension funds have also developed more connoisseur tastes for alternatives along with a growing appetite for the asset class in general over the last 20 years.
“A key trend that we have observed over the last few decades is the rotation from equities into alternative assets, as pension schemes have turned to private equity, property, and hedge funds, to diversify their portfolios and boost returns. The understanding of these specialist asset classes has also deepened considerably,” Gao said in a release.
“In the past, alternatives were grouped into a single category, but we now see a more granular approach being taken to these investments, with asset owners making distinct allocations of capital to the different asset classes such as private debt, commodities, liquid alternatives and infrastructure.”
However, in aggregate the largest pension jurisdictions covered by the TAI data have likely underperformed an indexed 60/40 mix of international equities and global bonds over all periods out to 20 years.
The study shows collective growth of pension funds in the 22 countries in the TAI universe amounted to about 5.4 per cent during the 20 years to the end of 2024 compared to 5.9 per cent annualised return for the notional 60/40 index portfolio: the seven largest pension fund regimes grew just 5.2 per cent in the same period.
“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.”
Overall, global pension scheme assets in the 22-country cohort were up about 5 per cent in 2024 to reach US$58.5 trillion.
The US holds by far the deepest pool of pension assets, reporting almost US$38 trillion at the end of last year followed by Japan (US$3.3 trillion) and Canada (over US$3.2 trillion).
But while the pension fund size-rankings have remained mostly stable over the previous two decades, Australia is on track to rapidly ascend from its current fifth spot after racking up “phenomenal growth” of almost 500 per cent since 2004.
“Should its current growth trajectory be maintained, [Australia] could become the second largest pension market globally by 2030,” the report says.
TAI says other notable trends in the global pension fund world include the rise of more systemic risks, increasing political pressure on investment decisions and the emergence of ‘organisational alpha’.
The ability to meld various scheme elements including business model, people and governance into a “cohesive whole” is “crucial for building the organisational resilience to build portfolios that meet investment goals in fast-changing conditions”.
Headed by Roger Urwin, TAI is a not-for-profit research offshoot from WTW (Willis Towers Watson) established in 2015.