The seven largest markets for pension assets (the P7) — Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S. — account for 92% of the P22, marginally higher than the previous year. The U.S. also remains the largest pension market, representing 62% of worldwide pension assets, followed by the U.K. and Japan with 7.4% and 7.2%, respectively.
The research also shows the shift to alternative assets continues apace and marks two decades of considerable change in pension fund asset allocation globally. In 1999, just 6% of P7 pension fund assets were allocated to private markets and other alternatives, compared to nearly a quarter of assets (23%) in 2019. This shift comes largely at the expense of equities and bonds, down 16% and 1%, respectively, in the period. The average P7 asset allocation is now equities 45%, bonds 29%, alternatives 23% and cash 3%.
“Besides strong growth in assets last year, there was a noticeable pickup in the decade-long trend of funds developing stronger strategies around their people. Larger funds, particularly those above $25 billion, continued to build larger, more sophisticated internal teams, with stronger leadership through CEO and CIO roles and greater role specialization in certain asset classes such as private markets. Smaller funds continue to outsource all or part of their CIO-type decisions, and we expect this to continue,” said Marisa Hall, co-head, Thinking Ahead Institute.
According to the research, total defined contribution (DC) assets continue to grow, representing slightly over 50% of total P7 pension assets. Last year, DC exceeded defined benefit (DB) assets for the first time, a culmination of 10 years of faster DC assets growth than DB (8.4% versus 4.8% annually), reflecting increased member coverage and, in some markets, higher contributions.
“The DC market has retained its newly found position as the larger of the two, as DB assets grow at a far slower pace. But the challenge of participant engagement, critical for stronger DC effectiveness, remains an unresolved issue for many sponsors,” said Michele Brennan, U.S. Defined Contribution Solutions leader, Willis Towers Watson. “As such, in the U.S. we expect this to be a particular focus for leading DC organizations as the next generation of plans takes shape. Also, with more flexible DC legislation and advances in technology, we see innovation in DC plans continuing. All leading to improvements within the nature of sponsor and participant interactions and resetting expectations.”
Other highlights from the study
Global asset data for the P22 in 2019
- The U.S. (62.5%) continues to be the largest market in terms of pension assets, followed by the U.K. and Japan with 7.4% and 7.2%, respectively.
- Total pensions assets to GDP ratio was 68.8% at the end of 2019.
- The Netherlands continues to have the highest ratio of pension assets to GDP (187%), followed by Australia (151%) and Switzerland (146%).
- The average 10-year compound annual growth rate figures (in U.S. currency) for P22 markets is 6.5%.
- Estimated five-year growth rates (in local currency) range from –0.6% per year in France to 15.2% in India.
- The U.S. continues to hold the largest weighting (62.5%) within the P22; while the weights of Hong Kong and South Korea marginally increased relative to the other markets in the study over the past 10 years.
- 10-year figures (in local currency) show the Netherlands grew its pension assets the most as a proportion of GDP by 73 percentage points (pp) to reach 187%, followed by Australia (41 pp to 151%), the U.S. (41 pp to 136%), Switzerland (40 pp to 146%) and the U.K. (39 pp to 126%).
Asset allocation for the P7
- Equities allocations for the P7 markets have decreased by 16 pp in aggregate during the past 20 years (61% to 45%), which funded the corresponding increased allocation to alternative assets.
- Allocations to bonds remained broadly unchanged in P7 markets, down 1 pp to 29%.
- The home bias toward equities has fallen, on average, with the weighting down to 39.7% in 2019 from 68.6% in 1999.
DC/DB assets for P7
- DC pension assets have grown from 31% in 1999 to 50% in 2019 of total pension assets.
- Australia continued to have the highest proportion of DC to DB pension assets, with 86% of its total pension assets in DC funds.
- Japan (95%), Canada (94%), the Netherlands (94%) and the U.K. (82%) continue to be markets dominated by DB pension assets.