Pension assets held in private pension schemes hit their highest-ever level in 2016, totalling more than US$38trn, according to the OECD’s latest report on such schemes, but pressures on managers to boost yields is raising concerns about potentially riskier assets being added to portfolios.
The OECD’s annual report on the private pensions industry in OECD countries, Pensions Markets in Focus, found that as of last year, investment losses resulting from the 2008 financial crisis had been recouped by private pension scheme managers “in almost all reporting OECD countries”.
“However, the low-interest rate environment continues to exert pressure on [private] pension providers, through lower yields on the bond portion of their portfolio investments, which may affect their ability to maintain promises to plan members,” the OECD said, in a summary of the report’s findings.
“This has given rise to concerns that pension providers could increase their exposure to riskier investments in a search for potential higher yield.”
The report’s authors go on to argue that such risks aren’t necessary, since higher returns are achievable “without an undue increase in risk through well-diversified asset allocation…by investing in different types of instrument, in different sectors, or in assets issued by entities located in different countries or expressed in different currencies”.
The 40-page report includes a section which focuses on foreign investment by pension providers, and looks at what operational and regulatory hurdles may exist when investing abroad.
Among the report’s other findings:
- Funded and private pension arrangements continued to expand last year in such countries as Australia, Canada, Denmark and the Netherlands, where pension assets exceeded the size of the countries’ GDPs. This, the OECD researchers noted, “reflects a trend which has seen pension assets grow faster than GDP in most countries over the last decade”, which is most pronounced in countries with large private pension markets.
- Pension providers “experienced positive real investment rates of return, net of investment expenses, in 2016 in 28 of the 31 reporting OECD countries, and 25 of the 32 reporting non-OECD jurisdictions”.
These rates of investment return were above 2% on average, both inside and outside the OECD area.
- Annual returns were also positive over the last decade in most countries, with the highest average annual real investment rates of return (net of investment expenses) observed in the Dominican Republic (6.3%), Colombia (5.8%) and Slovenia (5.2%).
Based in Paris, the OECD (Organisation for Economic Cooperation and Development) dats back to 1960 and has 35 members, including the US, UK, Japan, Australia, Germany, France, Spain and Austria.
The Pensions Market in Focus report looks at data from the national authorities in 85 countries, within the framework of the OECD’s Global Pension Statistics project. To view and download a copy of the report, click here.