UK overtakes Japan as world's second-biggest pensions market

LONDON (REUTERS) - Years of sluggish growth in Japan have stripped it of its long-held status as the world's second-biggest pensions market and it has been overtaken by Britain where pension assets have hit an all-time high, according to research.

A decade ago, Japan boasted a pensions market more than twice the size of Britain's and second only to the United States (US). But low bond yields and a weak economy have seen assets creep up by just 11 percent in the intervening period.

By contrast, the United Kingdom market has almost tripled.

British pensions assets grew by over 13 percent in 2013 to more than 2 trillion pounds (S$4.1 trillion), according to the Global Pensions Asset Study by consultancy Towers Watson, thanks to rallying stock markets and a rise in UK government bond yields.

The pace of growth in British pension assets last year highlights how the rising bond yields are helping schemes to recover after years of quantitative easing, which had pushed yields down and widened pension deficits.

According to the Pension Protection Fund, a watchdog, the aggregate deficit for 6,150 final salary pension schemes dropped to an estimated 27.6 billion pounds in December from 59.7 billion pounds in November.

With smaller deficits to plug, corporations have more money available to invest in their businesses, potentially providing a boost to the British economy.

"The recovery of the UK pensions systems has given the government, scheme sponsors and fiduciaries an important breathing space," said Mr Chris Ford, head of investment for Europe, the Middle East and Africa at Towers Watson.

UK pension fund allocation to equities, though down to 50 per cent from 65 per cent since 2003, is higher than in Japan and the Netherlands, where a more conservative strategy saw higher allocations to bonds, the study showed.

"During 2013 equities enjoyed their best calendar year of risk-adjusted return since the financial crisis," Mr Ford said.

"As a result many UK pension funds are in the best shape they have been for many years." The United States' pensions market, which allocates 57 per cent of its assets to equities, remains by far the largest in the world, with assets of over US$18 trillion.

UK pension assets as a percentage of GDP have almost doubled in the past ten years and stood at 131 per cent in 2013, up from 67 per cent in 2003, according to the Towers Watson study which was released on Wednesday.