Global Pension Funds On the Rise

Reports of the death of penions have been greatly exaggerated.

Towers Watson’s Global Pension Assets Study for 2013 shows global institutional pension fund assets in the 13 major markets — Australia, Canada, Brazil, France, 160786629--global financesGermany, Hong Kong, Ireland, Japan, Netherlands, South Africa, Switzerland, the United Kingdom and the United States — grew by 9 percent during 2012 to reach a new high of $30 trillion (in U.S. dollars).

The growth, according to the New York-based professional-services firm, is the continuation of a trend that started in 2009, when assets grew 17 percent, and in sharp contrast to a 21 percent fall during 2008. In the United States, institutional pension-fund assets hit an all-time high of $16.9 trillion in 2012, a 10 percent increase for the year.

Also, the ratio of global assets to gross domestic product is just below the level reached in 2007, before the Great Recession. The study says pension assets now amount to 78 percent of global GDP, “which is significantly higher than the 72 percent recorded in 2011 and substantially higher than the 61 percent recorded in 2008,” Towers Watson’s release says.

“Given the extreme economic and market volatility we have experienced during the past five years,” says Carl Hess, global head of investment at Towers Watson, “it was a relief for many penion funds to finish the year in better shape than when it started, for a change.

“While volatile markets are expected to continue for the foreseeable future,” he says, “pension funds are now generally better equipped to deal with them.”

Hess says that, during the past five years, “we have seen many funds deal with their governance shortfalls and, as a result, a growing number of funds have either more qualified people working on their investments or they have outsourced the running of all or part of their portfolios to third parties.”

In addition, he says, “pension funds are implementing investment strategies that are more flexible and adaptable and [that] contain a broader view of risk so as to make greater allowance for extreme events.”

One post on the Pension Pulse blog notes that the study does not take into account global liabilities, and this should be factored in to the equation. “As global pension assets are hitting an all-time high,” it says, “liabilities have continued to skyrocket with the net result being that global-funding levels — the only true measure of pension health — are far from the pre-crisis levels even though they stabilized somewhat in 2012.”

Neverthless, the news is still good.

Pension Pulse quotes Chris Ford, EMEA head of investment at Towers Watson, attributing some of the good news to better fund management; namely, the fact that “many funds are buying fewer bonds than before, and those considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities.”

So can this portend the eventual demise of defined-contribution funds? Not likely. The blog reports DC pension scheme assets on a slight but steady incline, growing from 43 percent in 2002 to 45 percent in 2012, as governments try to phase out costly final-salary pension plans.

Also, Ford says, “defined contribution funds continue to gain in popularity around the world while various governments and companies battle the rising demographic tide by auto-enrolling.”

Overall, a better year for retirement than I’d been thinking and hearing.