Pension funds battered by the financial crisis performed strongly last year after stock markets recovered in the wake of the Greek debt crisis.
Pension fund deficits, which have plagued final salary occupational schemes around the world, narrowed as assets in the 13 largest pension markets hit a record high of $26.5 trillion (£16.4tn).
The figure for pension fund assets dwarfs the $3.5tn amassed by sovereign wealth funds and the $2.5tn of foreign debt owned by the Chinese government.
The steep rise in assets should give pension savers some comfort that commitments to a guaranteed retirement income will be honoured, but experts pointed out that the global asset/liability ratio is still well down from its 1998 level.
Roger Urwin, global head of investment content at Towers Watson, said it is now quite common for a pension fund to be 25% underfunded whereas in the 1990s they were 100% funded.
"By and large pension funds still have a long way to go to make sure assets match their liabilities," he said.
He noted that there were EU efforts under way to press pension funds to have more solvency protection similar to insurance companies. The Netherlands, where pension assets make up 134% of GDP, is usually held up as an example.
UK and US companies have switched employees out of final salary schemes into cheaper arrangements based on stock market returns. The Netherlands has begun to make the switch in the belief that deficits are unlikely to be eradicated while life expectancy continues to increase.
The Towers Watson survey found that pension fund assets increased by 12% in 2010 as stock markets recovered. This compares with 17% growth in 2009 and a 21% drop in 2008 at the height of the financial crisis, which took assets back to 2006 levels. Global pension fund assets have grown 66% since 2000 when they were valued at $16tn. The UK, the third-largest pension market after the US and Japan, has grown to $2.3tn from $1.3tn in 2000. Pension assets now amount to 76% of GDP, an improvement on the 2008 figure of 61%, but still below the pre-crisis level of 78% in 2007.
The UK now has as much invested in pension funds as the value of its GDP. It also has the highest allocation to equities in the world, of 55%, although this is down from 74% in 2000. Just over a third is invested in bonds, 3% in cash and 7% in other assets such as property. Urwin said this was down to culture: "UK pension funds have had a historical orientation to equities for some time. It was almost the first pension fund industry to invest to a large degree in equities."
UK funds have been slow to invest in alternative assets such as property, partly because they are often run by boards of trustees who lack the resources. "Equities are easier to manage than the alternatives."
The US, Australia and Canada also invest more in equities than the rest of the markets. Japan, the Netherlands and Switzerland are more risk averse, with higher than average exposure to bonds.
At the end of 2010, the average global asset allocation of the seven largest markets was 47% equities, 33% bonds, 1% cash and 19% other assets.
In the UK, 90% of pension assets are held by private sector companies. The picture is similar in Australia where 86% of assets are in the private sector. By contrast, 70% of assets in Japan and 62% of Canadian assets are held by the public sector.
The report also shows that Brazil had the highest growth in pension fund assets, of 15%, over the last decade, followed by South Africa at 13%, Hong Kong at 11% and Australia at 10%. The countries with the lowest growth were Japan with 0.2%, Canada and France, both at 1%, and Switzerland at 2%.
Last year, pension assets rose in almost all 13 markets in dollar terms with the exception of crisis-struck Ireland and France, partly driven by a weaker euro. Australia, Japan, South Africa, Switzerland, Canada and Brazil benefited from their currencies' appreciation against the dollar in 2010. Only the pound and the euro weakened against the dollar, by 2.9% and 7.5% respectively.
Source: http://www.guardian.co.uk
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