HONG KONG, February 26, 2024 – Global pension assets returned to growth in 2023, rising in aggregate by 11% to reach USD 55.7 trillion, according to the Thinking Ahead Institute’s latest Global Pension Assets Study.
This compares to USD 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 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 60% global equities and 40% global bonds, stood at 16.6% in the twelve months to December 2023.
On a related note, actual investment allocations among global pension funds have shifted considerably over the 20-year history of the study. Since 2003, equity allocations have shrunk by nine percentage points over two decades, from 51% to stand at 42% in 2023. Meanwhile, allocation to bonds among global pension funds remains stable at an average of 36% – 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. Such ‘alternatives’ now make up 20% of global pension investments compared to just 12% 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% to an estimated 3% over the last two decades.
The Australian pension market has the highest allocation to equities (51%) and lowest allocation to bonds (15%) of the largest seven pension markets, reflective of the domination of the defined contribution approach in the Australian market, with these weights unchanged from 2013.
Considered individually, the United States dominates as the largest single pensions market, accounting for 63.9% of assets among the largest 22 pension markets, followed by Japan and the UK with 6.1% and 5.8% respectively. Together, these three largest markets account for over three quarters of global pension assets. Australia is the fifth largest pension market (behind Canada), with 4.4% of the assets of the largest 22 pension markets. Australia also has the fourth highest ratio of pension assets to GDP at 145%, trailing only the Netherlands, Switzerland and Canada.
An overwhelming 91% of P22 assets are concentrated in the seven largest markets. TAI conducted a deeper analysis of this top ‘P7’, now comprising assets of USD 50.8 trillion as of 2023. Within this group, defined contribution (DC) pensions now account for a 58% majority, up from 48% in 2018, with most countries gradually following Australia’s shift towards DC.
Pensions systems and structures continue to evolve. While DB funds still dominate in the Netherlands and Japan at 94% and 95% 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, DC assets already make up 88% of total pension assets while Canada, formerly home to a clear DB majority, has seen DC rise to a considerable 44% share. In the UK, DC now exceeds a quarter of pensions assets, leaving UK DB assets at 74% and steadily declining as a share of the total.
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.”
Jayne Bok, Head of Investments, Asia, WTW, said: “There is still room to grow in Asia Pacific, with many pension markets still in their accumulation phase, and various governments announcing pension reform that should further accelerate pension wealth in this region. Over the last decade, Australia, Hong Kong, Japan, and South Korea all achieved significant increases in pension assets as a percentage of GDP.
“Asia has also come a long way in terms of diversification. Not only in terms of reducing domestic exposure, but also in terms of increasing allocations to alternatives. Many of the more sophisticated public pension funds in our region are now allocating 10 to 15% to alternatives, and I’d expect to see allocations continue to move closer to 20% in line with more developed pension markets.”
Jessica added, “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 organisational 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.
“Many of the more sophisticated public pension funds in Asia are now allocating 10 to 15% to alternatives, and I’d expect to see allocations continue to move closer to 20% in line with more developed pension markets.”
Jayne Bok | Head, Investments Asia, WTW
“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.”
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 Thinking Ahead Institute
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