Global pension assets rebound past USD 55 Trillion
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The resurgence of global pension assets, with an aggregate growth of 11% to USD 55.7 trillion, marks a significant recovery from the previous year's downturn. This rebound is indicative of the resilience of the pensions industry and suggests a restored investor confidence driven by improved capital market performance. The reported 16.6% return for a reference portfolio of global equities and bonds underscores a robust market recovery that could potentially lead to increased pension funding levels. However, investors should monitor the sustainability of this growth, considering the historical volatility and the potential for future market corrections.
Shifts in asset allocation, particularly the reduction in equity exposure and increased diversification into alternative investments, reflect a strategic response to market volatility and a search for higher returns. This trend towards alternatives, now constituting 20% of global pension investments, could imply a long-term strategic shift that may affect the risk profile of pension portfolios. The implications for stakeholders include a potential for higher returns but also an increased complexity in portfolio management and due diligence requirements.
Defined contribution (DC) pensions now accounting for a 58% majority in the P7 markets, with a notable shift away from defined benefit (DB) plans, signals a transfer of investment risk from employers to employees. This transition requires stakeholders to be more proactive in their retirement planning, as the responsibility for investment decisions and retirement outcomes shifts increasingly to individual savers. The evolution of pension systems, with regulatory changes and the adoption of hybrid models, could lead to a more dynamic and possibly more efficient pensions landscape, but also requires careful navigation to ensure retirement security.
The reported growth in global pension assets has broader economic implications, particularly in terms of household wealth and consumption patterns. As pension assets increase, there is a potential for a positive wealth effect that could stimulate consumer spending and contribute to economic growth. However, this effect is contingent on the continued performance of the financial markets and the moderation of inflation rates as noted in the report.
Additionally, the stability in bond allocations at 36% suggests that pension funds continue to seek balance between risk and return, maintaining a significant position in fixed-income securities despite low interest rate environments in recent years. The slight increase in cash allocations, from 1% to 3%, could be interpreted as a cautious approach by pension funds in response to systemic risk and market uncertainty, providing liquidity to manage short-term obligations and market downturns.
Furthermore, the increasing regulatory interest and government influence on pension schemes, as highlighted in the report, could lead to shifts in investment strategies. Governments seeking to fund systemic investments to address issues such as climate change and technological advancement may influence pension fund allocations. This intersection of finance and policy underscores the importance of pension funds in societal and economic structures and their potential role in funding long-term, capital-intensive projects.
The geographical concentration of pension assets, with the United States dominating at 63.9% and the top seven markets accounting for 91% of assets, indicates the uneven distribution of pension wealth globally. This concentration suggests that pension asset growth and investment strategies may be heavily influenced by the economic and regulatory conditions in these dominant markets. As such, global pension trends could be disproportionately affected by policy changes or economic events in these few countries.
The shift in pension fund allocations towards alternative asset classes, such as real estate, infrastructure and private equity, represents a search for yield in a low-interest-rate environment and a response to the changing dynamics of the global investment landscape. This diversification strategy could lead to increased demand for such assets, potentially impacting their pricing and availability.
The emphasis on the combination of human intelligence (HI) and artificial intelligence (AI) in redefining pension funds' operating models points toward a trend of increased technological integration in the industry. The adoption of AI could enhance financial analysis, risk management and reporting capabilities, leading to improved decision-making processes. However, it also raises questions about the future skill sets required in the industry and the potential for disruption in traditional investment management roles.
NEW YORK, Feb. 26, 2024 (GLOBE NEWSWIRE) -- Global pensions assets returned to growth in 2023, rising in aggregate by
This compares to USD 50.2 trillion at the end of 2022, when the same study by the Thinking Ahead Institute (TAI) had previously measured the largest annual fall since the global financial crisis, interrupting a decade of previous uninterrupted growth.
The return to growth during 2023 is, in large part, the result of stronger capital market performance throughout the year, following a much more negative impact from markets in the correction of 2022. The TAI estimates that the (USD-measured) return for a reference portfolio of
On a related note, actual investment allocations among global pension funds have shifted considerably over the twenty-year history of the study. Since 2003, equity allocations have shrunk by nine percentage points over two decades, from
Compared with 20 years ago, pension funds’ asset allocation to “other” asset classes - from real estate and infrastructure to private equity - has significantly increased. Such ‘alternatives’ now make up
Considered individually, the United States dominates as the largest single pensions market, accounting for
An overwhelming
Pensions systems and structures continue to evolve. While DB funds still dominate in the Netherlands and Japan at
In Australia, defined contribution assets already make up
Jessica Gao, director at the Thinking Ahead Institute said: “Pension assets are growing once again – just as the importance of the pensions industry itself consistently increases in a world facing new challenges and opportunities for future prosperity. Growth is back on the agenda.
“This global growth is not yet rapid, and pension assets remain behind their pre-2022 position, but it is far better than the experience a year before. Inflation has moderated, and as a result financial markets have remained supported by interest rates which appear also to have peaked, at least for now, in most countries.
“Alongside this encouraging bounce-back, there are still essential lessons and warnings. Systemic risk, which is the possibility of a malfunctioning of the system, is still rising. So too are the day-to-day expectations on pension funds to adapt fast in a changing world. We are already seeing many asset owners redefine their operating model as a partnership of HI and AI – human intelligence and artificial intelligence – to craft and deliver innovative financial solutions, produce more accurate and timely reporting and foster organizational agility.
“Meanwhile, the pensions industry also faces a growing interest from regulators. Government influence on pension schemes is also at high level as governments look for new ways to fund the systemic investment needed to overcome capital-hungry systemic issues such as the energy transition, climate change mitigation and sustained high-tech growth.
“To maintain positive momentum and well-funded future pensions incomes for end investors, any truly long-term investor must continue to pay attention and think in terms of complete systems – especially as the world approaches the end of the first quarter of the 21st century.”
Notes to editors:
*As of December 31, 2023
- The P22 refers to the 22 largest pension markets included in the study which are Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Spain, Switzerland, the UK and the US
- The P7 refers to the seven largest pension markets (
91% of total assets in the study): Australia, Canada, Japan, Netherlands, Switzerland, UK and US. - All figures are rounded and 2023 figures are estimates.
- All dates refer to the calendar end of that year.
About the Thinking Ahead Institute
The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation member group made up of engaged institutional asset owners and asset managers committed to mobilising capital for a sustainable future. It has 50 members around the world and is an outgrowth of the WTW Investments’ Thinking Ahead Group which was set up in 2002. Learn more at www.thinkingaheadinstitute.org.
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