Pension funding across top 22 markets hits $41 trillion

The pension funds of 22 of the world’s largest countries have topped more than $41 trillion in asset value, buoyed by strong equity results over 2017. The US remains on top in terms of asset size, at more than $25 trillion, followed by the UK. Equities remain the dominant asset type, although alternative assets, such as private equity and property, continues to see growth.

As a number of the world’s leading economies face the conundrum of a rapidly ageing population, new analysis of the world’s 22 largest pension pots has considered their recent growth, as well as type and allocation. The Willis Towers Watson report, titled ‘Global Pension Asset Study 2018’, is based on hard market data until 2016 and market movements for 2017 estimates.

Across the 22 pension funds featured in the analysis, a total of $41.3 trillion has been saved for retirement. The current total is up considerably from last year’s analysis, reflecting strong growth in equity markets as well as alternative assets, such as the private equity and other private markets.

The US has the world’s largest total asset pool of $25 trillion, or around 131% of the country’s GDP, while the UK comes in second place with $3.1 trillion in retirement assets or around 121% of GDP. The Netherlands has the highest level of pension assets relative to GDP, at 193.8%, while Chile has the lowest, at 1.5%.

Asset growth

While liabilities continue to grow, with a wide range of markets having seen the gap between liabilities and assets grow since the financial crisis, the most recent year was relatively positive for pension asset growth: up by 15.2%. Strong performances were noted in South Africa (more than 25%) and Hong Kong (more than 20%), although the former had a relatively poor run in the previous ten-year period.

Over the group as a whole, past five years have been more modest, with growth at 4.6%; while over the ten-year period – which covers the worst effects of the Great Depression – the total asset pool has grown at 3.2% annually to 2017.

Over the past two decades, the top ten countries in terms of pension asset holdings have been relatively stable, with the US out ahead – total assets grew from almost $8 trillion in 1997 to $25.4 trillion last year. Japan has seen its asset pool decline, in part, on the back of an ageing population – with the country falling behind the UK, despite warnings that Britain faces a similar pension depletion as a significant portion of its workforce also approaches retirement.

Canada and Australia have been tussling for fourth place, with Australia – born by mineral riches – comes out on top in the latest edition with assets of $1.9 trillion. Canada comes in fifth place with assets of $1.7 trillion. The Netherlands and Switzerland round off the top seven.

Asset allocation

The top seven have relatively diversified funding types, although heavy focus on equities, seen prior to the financial crises (55%) has shifted in recent years towards alternative assets, often in private markets, including PE firms – with total allocation to the segment up from 15% in 2007 to 21% in the most recent survey. Bonds, have meanwhile remained relatively stable on 2007, but are down considerably from their allocation in 1997, which then stood at 35%.

Different countries have markedly varied allocation strategies, however, with the US focused more heavily on equities (50%) and alternative assets (around 30%), while the Netherlands is more conservatively invested in bonds (50%), with equities below 40%. Switzerland has a relatively equal distribution, while Japan is the most heavily invested in bonds, at almost 60% of total allocation.

Commenting on the results, Roger Urwin, global head of investment content at Willis Towers Watson, said, “While the short-term figures are positive these are due to unusually high market returns.  Looking back at 20 years of progress makes for encouraging reading. In particular, the improving position of pension assets as a proportion of GDP and the evolution of pension fund governance, which has risen up trustees’ agendas and is certainly a lot stronger as a result.”