Global pension assets reach all-time high as retirement plans change tack

LONDON (REUTERS) - Pension fund assets in the world's biggest markets rose by 8.9 per cent last year, as retirement schemes shifted their attention to alternative investments to cope with economic volatility, a study showed.

Institutional pension fund assets in the 13 major markets grew by 9 per cent, reaching a new high of US$30 trillion (S$37 trillion), while British pension fund assets hit an all-time high of 1.7 trillion pounds (S$3.3 trillion) last year, a 5 per cent increase from last year, the report by Towers Watson found.

The growth in pension assets in the 13 countries, including Australia, Germany, Japan, the Netherlands, Britain and the United States, was attributed to hiring more qualified people to manage pensions, outsourcing portfolios and better investment choices.

Towers Watson, a consultancy that advises institutional investors, including pension funds, on investment and risk management, said the countries' pension assets accounted for 78.3 per cent of the gross domestic product of their economies, below the 2007 level of 78.8 per cent but above 2011's 72.2 per cent.

Global pension fund assets have grown at over 7 per cent on average per annum since 2002.

Funding levels of pension schemes are determined by factors like economic growth, equity market returns and yields on gilts.

Activity in the seven biggest pension markets within the top 13 countries showed that pension funds have steered away from investing in bonds and cash allocations in the past 18 years.

Australia, Canada, Japan, the Netherlands, Switzerland, Britain and the US have upped alternative investments, such as property, hedge funds, private equity and commodities, from 5 to 19 per cent since 1995, the study found.

Government gilts, in particular, a staple for pension funds, have seen yields drop sharply since the crisis, making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to their portfolios.

Britain has increased its exposure to alternative assets the most, from 3 per cent to 17 per cent, followed by Switzerland, Canada, the US and Australia.

"So many funds are buying fewer bonds than before, and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities," said Mr Chris Ford, EMEA head of investment at Towers Watson.

At the end of last year, 47.3 per cent of the assets allocation fell into equities, 32.9 per cent into bonds, 1.2 per cent cash and 18.6 per cent into other assets.

The largest pension markets are the US, Japan and Britain, representing 56.6 per cent, 12.5 per cent and 9.2 per cent, respectively. US pension assets grew 10 per cent, Japan's 0.5 per cent and Britain's 9.9 per cent.

Meanwhile, "defined contribution" (DC) pension scheme assets grew from 43 per cent in 2002 to 45 per cent last year, as governments try to phase out costly final-salary pension plans.

"Defined contribution funds continue to gain popularity around the world while various governments and companies battle the rising demographic tide by auto-enrolling," Mr Ford said, referring to moves by governments including Britain's to make it compulsory, albeit with the chance to opt out later, for private sector staff to join workplace pension plans.