Defined contribution (DC) assets account for over 50 percent of total assets across the world’s seven largest pension markets, for the first time, according to the latest figures in the Global Pension Assets Study conducted by Willis Towers Watson’s Thinking Ahead Institute, released Feb. 11.
This continues the trend of DC growing at a faster pace over the past 10 years, with DC assets growing by 8.9 percent, while defined benefit (DB) assets have grown by 4.6 percent during this time.
“We’ve reached a pivotal moment in the DC pension assets growth story, as they exceed DB pension assets for the first time, after a slow and steady grind over 40 years,” said Steve Carlson, North America head of Investments, at Willis Towers Watson. “But despite its long history, DC is still weakly designed, untidily executed and poorly appreciated.”
The Thinking Ahead Institute said it will take better DC design and engagement models to create meaningful contributions to retirement security.
Pension regulation and employer practice has been behind the long movement away from traditional DB pensions; including U.S. 401k enactment in 1978, Australia Superannuation Guarantee in 1992; and UK auto-enrolment in 2008.
The seven largest markets for pension assets (what the Thinking Ahead Institute refers to as the “P7”) — Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S. — account for 91 percent of the 22 major markets (P22). The U.S. continues to be the largest pension market, representing 61.5 percent of worldwide pension assets, followed by Japan and the U.K. with 7.7 pecent and 7.1 percent respectively.
Global institutional pension fund assets in the P22 fell to $40.1 trillion at year-end 2018, according to the study. This represents a decrease of 3.3 percent in the 12-month period.
The average asset allocation of the P7 is equities 40 percent, bonds 31 percent, other 26 percent and cash 3 percent. This marks a decrease of 20 percentage points in equity allocations over the past 20 years, while allocations to other assets, such as real estate and other alternatives, have increased by 19 percentage points.
Australia and the U.S. continued to have above average equity allocations, with 47 percent and 43 percent. Meanwhile, the Netherlands, U.K. and Japan have above-average exposure to bonds, while Switzerland has the most even allocations across equities, bonds and other assets.
In reviewing the study’s data, Carlson also noted how much funds have benefited from private market diversification. “2018 was the third-worst year for pension asset growth in the past 20, but it would have been quite a lot worse without the contribution from private markets that produced important risk diversification,” Carlson said.
Roger Urwin, global head of Investment Content at the Thinking Ahead Institute, said pension funds will continue to face a range of issues over the next five to 10 years. “These include the shifting focus in pension design toward a DC model; the growing impact of evolved regulations; and further integration of ESG, stewardship and long-horizon investing.”