NZ is among the top five of 25 plus jurisdictions as measured by exposure to offshore assets in pension funds, according to a new study.
The report, a collaboration between PWC and the Association of the Luxembourg Fund Industry (ALF), found half of NZ pension assets were invested offshore – well above the overall average of a third.
Pension funds in the Netherlands had the highest exposure to foreign assets at roughly 90 per cent while Brazil was the most stay-at-home country with less than 1 per cent invested offshore.
“New Zealand pension funds’ allocation to foreign assets is of 50% in 2018, high compared to the other countries,” the ALF study says.
Based on end of 2018 figures, NZ pension funds had shipped about $40 billion overseas of the total $81 billion invested. However, the AIF figures include the NZ Superannuation Fund (NZS), which represented just under half of total pension assets at the time.
Total NZ pension fund assets have grown significantly since the ALF reporting date to over $130 billion in a figure comprising NZS ($47 billion), KiwiSaver ($63 billion) and other superannuation funds ($25 billion).
NZ is among the bulk of countries with no formal limits on pension fund offshore investing. But of those jurisdictions that have imposed foreign investment buffers, many are now questioning those constraints, the report says.
“In recent years… many pension funds have sought to spread their risk and increase yield by increasing their foreign investment limits,” the ALF paper says.
And pension funds everywhere are sending more assets overseas for several reasons.
For example, in many developed nations beset by ultra-low interest rates “pension funds are increasing their foreign investments to tap into thriving foreign markets to increase returns and reduce volatility”.
“Increasing foreign exposure also helps to mitigate local company and sector risks,” the report says.
Global pension fund assets should hit US$61 trillion in total by 2025, according to ALF, up almost 50 per cent on the December 2018 figure.
During the next few years the sector should also see a shift to more passive investing (balanced by higher exposure to alternative assets), an increase in sustainable strategies and further pressure on fees, the study says.
“In fact, as passives continue growing, pension funds will need active managers to deal with some of the inefficiencies that may result from a passive driven market,” the report says. “Passive rise is a foundational change in the way pension plans now manage their portfolios as both active and passive are needed.”
Nonetheless, ALF says pension fund passive investments should “rise to US$36.6tn by 2025, up from US$23.2tn in 2017”.
“Looking forward, a shift from market capitalisation-weighted indices towards smart beta, factor-based, ESG (environmental, social and governance) and other thematic strategies is to be expected as a result of passives becoming increasingly popular,” the report says.
As pension investors become more global in outlook, the market for cross-border fund structures – such as the ‘Undertakings for Collective Investment in Transferable Securities’ (or UCITS) system – should increase further, Corinne Lamesch, ALF chair, says in the study.
“UCITS remains a key vehicle for many pension funds seeing exposure to worldwide markets,” Lamesch says.
Established 30 years ago, UCITS is now “the EU’s “most recognised financial export”, she says. Luxembourg is home to about two-thirds of UCITS funds with the European micro-nation settings its sights on further expansion including to Latin America.
Last year a group of countries, including NZ, launched the Asia Region Funds Passport (ARFP) in a bid to replicate the UCITS success. In December, the NZX-owned Smartshares registered the first AFRP product – initially targeting the SuperLife NZ Dividend Fund for a Japan launch.