Following negative impact from markets in the correction of 2022, 2023 global pension assets return to growth position - report
Global pensions assets returned to growth in 2023, rising in aggregate by 11 percent to reach US$55.7 trillion, due in part to stronger capital market performance throughout the year, says Thinking Ahead Institute’s latest Global Pension Assets Study.
This compares to US$50.1 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 stronger capital market performance throughout 2023 impacted results, following a much more negative impact from markets in the correction of 2022. TAI estimates that the (USD-measured) return for a reference portfolio of 60 percent global equities and 40 percent global bonds, stood at 16.6 percent in the 12 months to December 2023.
“Overall, it's a positive growth in 2023,” says Jessica Gao, director at the Thinking Ahead This is the biggest trend we have observed in our study this year.
“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,” says Gao.
“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.”
Asset allocations shift
The report also reveals that actual investment allocations among global pension funds have shifted considerably over the 20-year history of the study. Equity allocations have shrunk by nine percentage points over two decades, from 51 percent to stand at 42 percent in 2023. Meanwhile, allocation to bonds among global pension funds remains stable at an average of 36 percent – the same in 2023 as in 2003.
Compared with 20 years ago, pension funds’ asset allocation to ‘other’ asset classes – from real estate and infrastructure to private equity – has significantly increased. Alternatives now make up 20 percent of global pension investments compared to just 12 percent in 2003. At the same time, reflecting an awareness of market risk and systemic uncertainty among global pension funds, average allocations to cash instruments have slightly increased from 1.4 percent to an estimated 2.7 percent over the last two decades.
Gao says the asset allocation shifts per region will depend upon the type of pensions that dominate the market. “For example, in Australia, the defined contribution (DC) market has been long established, so the asset allocation in Australia has remained relatively stable over the year. In the UK, they are very heavy in defined benefit (DB) plans and some of their allocation is moving from equity to fixed income because of pension funds wanting to derisk.
“At the same time, we also need to consider how the market has moved, particularly when we capture a particular market there where equity is doing very well relative to fixed income.”
Considered individually, the US dominates as the largest single pensions market, accounting for 63.9 percent of assets among the largest 22 pension markets, followed by Japan and the UK with 6.1 percent and 5.8 percent respectively. Together, these three largest markets account for over three quarters of global pension assets.
An overwhelming 91 percent of assets in the largest 22 pension markets are concentrated in the seven largest markets. TAI conducted a deeper analysis of this top seven (P7), now comprising assets of US$50.8 trillion as of 2023. Within this group, DC pensions now account for a 58 percent majority.
Shift to defined contribution continues
Pensions systems and structures continue to evolve. While defined benefit (DB) funds still dominate in the Netherlands and Japan at 94 percent and 95 percent of total pensions assets, respectively, elsewhere there is a continued shift to DC. It needs to be pointed out that the Netherlands’ pension system is undergoing a reform, transitioning from the traditional DB to DC.
In Australia, defined contribution assets already make up 88 percent of total pension assets while Canada, formerly home to a clear DB majority, has seen DC rise to a considerable 44 percent share. In the UK, DC now exceeds a quarter of pensions assets, leaving UK DB assets at 74 percent and steadily declining as a share of the total.
“Meanwhile, the pensions industry also faces a growing interest from regulators,” says Gao. “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.
“Underneath systemic risk, you have geopolitical risk, climate related risk, social divisions, and market uncertainties and all these risks are interconnected and can be accumulated.
“We can describe it as a cloud full of traps and that is making it very tricky and very challenging for any institutional investor to fully grab how they're going to weather through this particularly challenging time.
“Arguably, none of us are doing very well managing systemic risk. But having said that, large pension funds are very much becoming aware of the impact of systemic risk can have on their portfolios.
“They are actively thinking about how they will need to adapt their organizational model, their investment strategies, and how they need to evolve with the outside world.
“To maintain positive momentum and well-funded future pension incomes, 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.”
