NZ has seen retirement savings asset growth outpace most countries over the last decade while hitting pension plan coverage akin to compulsory systems, according to new OECD data.
The latest OECD global pension study shows NZ pension fund assets grew at about 15 per cent per annum over the 10 years to the end of 2021, putting it among the top five or six countries by that metric.
While coming off a low base, the impressive 10-year asset-growth record coincided with the enthusiastic uptake of KiwiSaver that made NZ a standout in the OECD statistics.
“The coverage rates of pension plans are uneven across countries that are automatically enrolling workers while giving them the option to opt out,” the 2021 pension report says. “New Zealand has reached a coverage rate close to countries with a mandatory system, with 80.8% of the working-age population having a KiwiSaver plan in 2021, 14 years after starting enrolling newly hired employees automatically into this programme.”
But in many ways NZ is just playing catch-up to other developed jurisdictions where pension schemes (many of them compulsory) have been in force for longer.
For example, the average NZ pension fund contribution rate (mostly, reflecting KiwiSaver member behaviour) of about 4 per cent compared to GDP also pales against global leaders such as Iceland (over 10 per cent) and Australia (7 per cent).
As measured against the broader economy, NZ sits about mid-table with pension fund assets now representing almost 40 per cent of GDP – more than double the proportion recorded in 2001 but well below the total OECD ratio of 105 per cent.
By contrast, Denmark – which has a similar population size to NZ – has accrued the highest per-GDP pension funds that now amount to more than 230 per cent of its annual economic output.
Fueled by its 30-year old compulsory superannuation regime, Australian pension assets reached almost 150 per cent of GDP as at the end of 2021.
Total global retirement savings funds grew 7 per cent during 2021, the study says, to hit more than US$60 trillion (including some non-OECD countries).
“Funded and private pension plans have accumulated substantial assets to finance future pension benefits around the world,” the OECD says. “… Pension assets have increased faster than GDP over the last two decades, highlighting the growing importance of retirement savings worldwide.”
The rapid growth of retirement savings across the world over the last 20 years has also come with a tilt towards riskier assets overall.
“A shift away from bonds is more visible over the last 10 and 20 years,” the study says. “The proportion of investments in bonds declined by 8 percentage points on average among 48 reporting jurisdictions over the last 10 years, and by 17 percentage points on average among 16 reporting jurisdictions over the last 20 years.”
However, equities only picked up a portion of the reallocation from fixed income as pension funds added more alternative assets – picking up an official OECD warning in the process.
“The proportion of pension assets in alternative investments increased from 11.5% in 2001 to 18.6% in 2021 on average in these 16 jurisdictions. Adjustments to the portfolio of pension providers, potentially as a search for yield to meet pension promises, are not intrinsically bad as long as they do not imply an excessive increase in the risk profile of the portfolio,” the report says. “Nevertheless, pension regulators and supervisors need to continue to monitor these developments closely to avoid damaging increases in the risk profile of the portfolio of pension providers in their search for yield. The OECD argues that pension providers should only engage in these investments when they have the skills and expertise to assess the risks and potential rewards appropriately.”
In a post balance-date analysis, the OECD also suggests the Ukraine war (starting February 2022) has likely triggered pension fund losses despite only a tiny direct exposure to Russian assets of about 1 per cent.
The report flags potential spillover from the conflict to assets domiciled in other countries and macro-economic shocks (rising inflation and interest rates, for example) while noting “it may not be possible to assess the effect of the war and its consequences alone”.
Pension funds could benefit from modeling the impact of both single risk factors (war, interest rates, for instance) or more complex scenario analyses, the OECD says.
“These approaches could be useful for an assessment of the impact of an event abroad, or more broadly the materialisation of any geopolitical risk or other shock, on the portfolios of pension providers, whether the changes such event implies are purely theoretical or based on actual developments,” the report says.