Defined contribution (DC) assets across the world’s six largest pension markets exceeded defined benefit (DB) assets for the first time in 2019, research from the Thinking Ahead Institute has found.
The research body found DC assets across the six biggest markets had grown at 8.4 per cent a year over the decade to 2019, compared to 4.8 per cent for DB, reflecting increased member coverage and in some markets higher contributions.
Global institutional pension fund assets rose 15 per cent in 2019 and now stand at £36 trillion, with South Korea, Hong Kong and the US growing fastest over the last decade.
The last 20 years has seen a continued rise in allocations to private markets and other alternatives, from just 6 per cent to 23 per cent, at the expense of equities and bonds
The 2019 growth was driven, in part, by strong gains in equity markets during the year with Mexico (22.2 per cent), Canada (18.9 per cent) and the US (17.8 per cent) leading the way. This represents a significant swing in fortunes from 2018, which saw an overall 3.3 per cent decline in global pension assets.
The seven largest markets for pension assets (the “P7”) – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – account for 92 per cent of the P22, marginally higher than the previous year. The US remains the largest pension market, representing 62 per cent of worldwide pension assets, followed by the UK and Japan with 7.4 per cent and 7.2 per cent respectively.
The research also shows the shift to alternative assets continues apace and marks two decades of considerable change in pension fund asset allocation globally. In 1999, just 6 per cent of P7 pension fund assets were allocated to private markets and other alternatives, compared to 23 per cent in 2019. This shift comes largely at the expense of equities and bonds, down 16 and 1 per cent respectively, in the period. The average P7 asset allocation is now equities 45 per cent, bonds 29 per cent, alternatives 23 per cent and cash 3 per cent.
The report says that in 2019 there was a noticeable pick-up in the decade’s trends in organisational design towards a stronger ‘people model’ – the combination of people employed by the fund’s board and internal team, with reference to talent, roles, and delegations. This trend was apparent mostly in the larger funds – particularly those above US$25bn in assets, which account for about half of all pension fund assets. Such funds continued the trend to larger internal teams and correspondingly lighter dependencies on outside organisations
This has led to stronger leadership through CEO and CIO roles and more role specialisations in certain asset classes, notably private market assets.
Marisa Hall, co-head of the Thinking Ahead Institute says: “Besides strong growth in assets last year, there was a noticeable pick-up in the decade-long trend of funds developing stronger strategies around their people. Larger funds, particularly those above US$25 billion, continued to build larger and more sophisticated internal teams, with stronger leadership through CEO and CIO roles and greater role specialisation in certain asset classes, such as private markets. Smaller funds are continuing to outsource all or part of their CIO-type decisions and we expect this to continue.
“The DC market has retained its newly-found position as the larger of the two, as DB assets grow at a far slower pace. But the challenge of member engagement, critical for a stronger DC system, remains an unresolved issue for many schemes. As such, we expect this to be an area of particular focus for leading DC organisations as the next generation of plans takes shape. Advances in technology are opening up new possibilities for customisation, changing the nature of member interactions and re-setting member expectations. The future of DC is likely to be hyper-customised, with increased focus on individual participants, but many schemes need to improve their governance to fully embrace this.”