Shift to DC a Global Trend

The world’s pension assets grew 6% last year, and now amount to around 84% of global Gross Domestic Product (GDP), substantially higher than the 54% recorded in 2008.

That growth means that global institutional pension fund assets in the 16 major markets have now reached a new high of $36 trillion, according to Towers Watson’s Global Pension Assets Study. The growth is the continuation of a trend that started in 2009, when assets grew 18% — in sharp contrast to a 22% fall during 2008, when assets fell to around $20 trillion. On average, global pension fund assets have grown 6% a year since 2004, according to the report.

DC Versus DB

The research shows that DC assets grew rapidly during the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%. The 10-year CAGR for DB plan assets: just over 4%. As a result, DC assets have grown from 38% of all pension assets in 2004 to 47% last year, and are expected to overtake DB assets in the next few years.

Australia has the highest proportion of DC to DB pension assets: 85%/15%. Next is the United States, at 58%/42%. Only those two nations have a larger proportion of DC assets than DB assets.

On the other hand, Japan, Canada and the Netherlands are markets dominated by DB pensions, with 97%, 96% and 95% of assets respectively invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift toward DC, according to the report.

Asset Allocations

Over the past 10 years U.S. pension plans have maintained the highest bias to domestic equities (67% in 2014), having also increased domestic equity bias during the past three years. Canadian and Swiss funds remain the markets with the lowest allocation to domestic equities (33% and 34% respectively in 2014) while the United Kingdom’s exposure to domestic equities has dropped by more than half, to 36%, since 1998.

The research shows that Canadian and U.S. funds have retained a very strong home bias in fixed income investment since the research began (98% and 91% respectively in 2014), while Australian and Swiss funds have reduced exposure to domestic bonds significantly since 1998: down by 31% and 17% respectively during this period.

According to the research allocations to alternative assets — especially real estate and to a lesser extent hedge funds, private equity and commodities — in the larger markets have grown from 5% to 25% since 1995. In the past decade most countries have increased their exposure to alternative assets, with Australia increasing them the most (from 10% to 26%), followed by:

• the United States (16% to 29%)
• Switzerland (16% to 28%)
• Canada (13% to 22%)
• the United Kingdom (from 7% to 15%)

Other highlights from the report:

• The 10-year average growth rate of global pension assets (in local currency) is just over 8%. 
• The largest pension markets are the United States, the United Kingdom and Japan, with 61%, 9% and 8% of total pension assets respectively.
• The only two countries in the study to have decreased their allocation to bonds during this period are Australia (from 21% to 15%) and Switzerland (from 43% to 36%).