Global pension fund assets fell 3.5% to $40.1trn at the end of 2018 from $41.56trn the previous year, the third worst showing in 20 years, according to a report from Willis Towers Watson Investments, an advisory, broking and solutions firm.
The US is the largest pension market followed, at significant distance, by Japan and the UK. Together they account for over 76% of all pensions assets.
The report, which covers 22 major pension markets, also found that for the first time, defined-contribution (DC) plan assets overtook defined-benefit (DB) assets in the seven largest markets - Australia, Canada, Japan, Netherlands, Switzerland, the UK and the US. This was an extension of the trend of the past ten years where DC assets grew faster than DB assets.
Pension funds continue to face a range of issues over the next five to ten years. These include the shifting focus in pension design towards a DC model, the growing impact of evolved regulations and further integration of ESG, stewardship and long-horizon investing"
During the last ten years, the fastest growing pension markets have been Australia (10.2%), Chile (10.2%) and Hong Kong (8.5%) in USD terms. France and Japan have had the slowest rates of growth in USD terms since 2008 (0.1% and -0.7% respectively).
DC plan assets accounted for over 50% of pension assets in the seven biggest markets last year, according to the study released on February 11 by the Thinking Ahead Institute, a not-for-profit group that's part of Willis Towers Watson.
Roger Urwin, the institute's global head of investment content, says in the report that 2018 "was the third worst year for pension asset growth in the last 20 years but it would have been quite a lot worse without the contribution from private markets that produced important risk diversification".
According to the study, equities allocations in the seven largest markets dropped to 40% from 60% over the past two decades as pension funds put more money into alternative assets. The seven largest markets (the P7) comprises 91% of total pension assets.
2018 was the third worst year for P7 in the last 20, but the 5 year 2.9% pa and 10 year 6.5% pa are more revealing of the longer term pattern.
These seven markets accounted for 91% or $36.55trn of global pension assets last year, led by the US with a 61.5% share, or $24.71trn.
"Pension funds continue to face a range of issues over the next five to ten years. These include the shifting focus in pension design towards a DC model, the growing impact of evolved regulations and further integration of ESG, stewardship and long-horizon investing," Urwin said.
He added that in spite of the fact that DC pension assets surpassed DB assets, "DC is still weakly designed, untidily executed and poorly appreciated".
In DC plans, employees contribute a fixed amount of their salaries to an account to fund their retirement. DB plans guarantee a set payout after retirement.
The report says DC assets grew 8.9% over the last ten years, almost twice as fast as DB assets, which expanded 4.6%.
The other 15 pension markets covered in the study are Brazil, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Malaysia, Mexico, South Africa, South Korea and Spain.