Global pension funds weather the storm of 2020

Global institutional pension fund assets in the 22 largest major markets (the P22) continued to climb in 2020 despite the impact of the pandemic, rising 11 per cent to USD52.5 trillion at year end, according to the latest figures in the Thinking Ahead Institute’s Global Pension Assets Study.

The seven largest markets for pension assets (the P7) – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – account for 92 per cent of the P22, unchanged from the previous year. The US remains the largest pensions market, representing 62 per cent of worldwide pension assets, followed by Japan and the UK with 6.9 per cent and 6.8 per cent respectively.

According to the study, there was a significant rise in the ratio of pension assets to average GDP, up 11.2 per cent to 80.0 per cent at the end of 2020. This is the largest year-on-year rise since the study began in 1998, equalling the increase recorded in 2009 as pension assets bounced back after the global financial crisis. Whilst the measure usually indicates a stronger pension system, the sharp rise also underlines the economic impact of the pandemic on many countries’ GDP. Among the seven largest pensions markets, the trend was even more pronounced with a 20 per cent rise in the pension assets to GDP ratio to 147 per cent in 2020, from 127 per cent the year before.

The research also shows the shift to alternative assets continues, marking two decades of change in pension fund asset allocation globally. In 2000, just 7 per cent of P7 pension fund assets were allocated to private markets and other alternatives, compared to over a quarter of assets (26 per cent) in 2020. This shift comes largely at the expense of equities, down from 60 per cent to 43 per cent, in the period, while bond allocations fell marginally from 31 per cent to 29 per cent. The average P7 asset allocation is now equities 43 per cent, bonds 29 per cent, alternatives 26 per cent and cash 2 per cent.

DC assets are now estimated to represent almost 53 per cent of total pension assets in the seven largest pensions markets, from 35 per cent in 2000, making it the dominant model for pensions globally. During the last ten years, DC assets have grown at 8.2 per cent per annum, while defined benefit (DB) assets have grown at a slower pace of 4.3 per cent.

Australia continues to have the highest proportion of DC to DB pension assets, with 86 per cent of its total pension assets in DC funds, while conversely Japan (95 per cent), the Netherlands (94 per cent), and the UK (81 per cent) continue to be dominated by DB pension assets.

Marisa Hall, co-head of the Thinking Ahead Institute, says: “In what was a highly tumultuous year, pension funds continued to grow strongly in 2020, underpinned by ongoing multi-decade themes such as the rotation from equities to alternatives and the growth of DC, now the dominant global pensions model. This paints a picture of a resilient industry in good health and relatively well placed to weather the effects - economic and otherwise - of the ongoing pandemic. This is good news for billions of savers around the world. However, this shouldn’t mask the growing set of challenges that industry leaders face, particularly around addressing broader stakeholder groups’ needs and wants, while continuing to deliver financial security for their fund members.

“We believe one of the main challenges for pension funds, and opportunities for impact, is the effective stewardship of their assets. It is clear that the unstoppable ‘ESG train’ is picking up pace, and in some cases is being turbo-charged by climate change and the accelerating path to net zero. It is this focus on sustainability that will truly shape the pensions industry in the coming decades. A significant reallocation of capital is expected as the investment world undergoes a paradigm shift in extending its traditional two-dimensional focus on risk and return to one of risk, return and impact.”

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