Friday, February 1, 2013

Global Pension Assets Hit All-Time High?

Sarah Mortimer of Reuters reports, Global pension assets reach all-time high:
Pension fund assets in the world's biggest markets rose by 8.9 percent in 2012 as retirement schemes shifted their attention to alternative investments to cope with economic volatility, a study showed.

Institutional pension fund assets in the 13 major markets grew by 9 percent, reaching a new high of $30 trillion, while UK pension fund assets hit an all-time high of 1.7 trillion pounds in 2012, a 5 percent increase from last year, the report by Towers Watson found.

The growth in pension assets in the 13 countries including Australia, Germany, Japan, Netherlands, Britain and the United States, was attributed to hiring more qualified people to manage pensions, outsourcing portfolios and better investment choices.

Towers Watson, a consultancy that advises institutional investors including pension funds on investment and risk management, said the countries' pension assets accounted for 78.3 percent of the GDP of their economies, below the 2007 level of 78.8 percent but above 2011's 72.2 percent.

Global pension fund assets have grown at over 7 percent on average per annum since 2002.

Funding levels of pension schemes are determined by factors like economic growth, equity market returns and yields on gilts.

Activity in the seven biggest pension markets within the top 13 countries showed that pension funds have steered away from investing in bonds and cash allocations in the past 18 years.

Australia, Canada, Japan, the Netherlands, Switzerland, Britain and the United States have upped alternative investments, such as property, hedge funds, private equity and commodities, from 5 to 19 percent since 1995, the study found.

Government gilts in particular, a staple for pension funds, have seen yields drop sharply since the crisis, making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

Britain has increased its exposure to alternative assets the most, from 3 to 17 percent, followed by Switzerland, Canada, the United States and Australia.

"So many funds are buying fewer bonds than before, and those which are considering adding risk to their investment portfolios are most often diversifying into alternative assets rather than simply buying equities," said Chris Ford, EMEA head of investment at Towers Watson.

At the end of 2012, 47.3 percent of the assets allocation fell into equities, 32.9 percent into bonds, 1.2 percent cash and 18.6 percent into other assets.

The largest pension markets are the United States, Japan and Britain, representing 56.6 percent, 12.5 percent and 9.2 percent respectively. United States pension assets grew 10 percent, Japan's 0.5 percent and Britain's 9.9 percent.

Meanwhile, "defined contribution" (DC) pension scheme assets grew from 43 percent in 2002 to 45 percent in 2012, as governments try to phase out costly final-salary pension plans.

"Defined contribution funds continue to gain popularity around the world while various governments and companies battle the rising demographic tide by auto-enrolling," Ford said, referring to moves by governments including Britain's to make it compulsory, albeit with the chance to opt out later, for private sector staff to join workplace pension plans.
Indeed, defined-contribution (DC) plans are gaining popularity, much to the chagrin of those of us who have been making the case for boosting defined-benefit (DB) plans to mitigate looming pension poverty.

But let me get back to the article above. You can download the Towers Watson Global Pension Assets Study 2013 on their website or click here to go straight to the PDF file. Here are the key findings:
  • At the end of 2012 pension assets for 13 markets in the study were estimated at USD 29,754 bn, representing a 8.9% rise compared to the 2011 year-end value.
  • Pension assets relative to GDP reached 78.3% in 2012, still below the 2007 level of  78.9%, and also below the 2011 ratio of 72.2%.
  • The largest pension markets are the US, Japan and the UK with 56.6%, 12.5% and 9.2% of total pension assets in the study, respectively. 
  • In USD terms, the pension asset growth rate of these markets in 2012 was 10.0%, 0.5% and 9.9%, respectively.
  • It is important to caveat the impact of currency exchange rates when measuring the growth of pension assets in USD terms, as in many cases results vary significantly with those in local currency terms. For example, in local currency terms, the pension assets growth rate of Japan was 11.5% in 2012
  • During the last 10 years, DC assets have grown at a rate of 7.8% pa where DC assets have grown at a slower pace of 6.6% pa.
  • Currently DC assets represent 45.4% of total pension assets, having risen from 42.6% in past decade.
  • DC is dominant in Australia and US. Japan and Canada, both historically only DB, are showing signs of shifting to DC.
  • At the end of 2012, the average global asset allocation of the seven largest markets was 47.3% equities, 39.2% bonds, 1.2% cash and 18.6% other assets (including property and other alternatives).
  • The asset allocation pattern has changed somewhat compared to the end of 2011. Allocations to equities increased while allocations to bonds and other investments fell.
  • Australia and US have higher allocations to equities than the rest of the P7 markets.More conservative investment strategies -- more bonds and less equities -- occur in Japan, the Netherlands and Switzerland.
 There were other interesting points I noted in the study:
  •  The US pension market remains the most dependent market on domestic equities while Canada has been the least dependent market on domestic equities over the last 10 years.
  • US and Canada have most of their fixed income investments domestic bonds, while Australia is the market with more foreign fixed income exposure than the rest of P7.
  • Canada and Japan are the only two markets where the public sector holds more pension assets than the private sector, holding 57% and 73% of total assets respectively.  
  • Assets under management of the top 300 funds represented 46.7% of the total global pension assets in 2011
  • The top 20 funds accounting for 18.5% of the total pension assets globally.
  • The lower Gini coefficient for GDP (63%) relative to pension market size (76%) suggests that the global pension asset pool is more concentrated in a few large markets than what would be suggested by their GDP levels. This could be explained by a number of factors including but not limited to a more developed capital market and a more mature pension pension system within the leading markets.
I encourage you to go over the entire Towers Watson Global Pension Assets Study 2013 as there is a lot more covered and they go over their methodology in detail.

From my perspective, not surprised by the findings as the bull market in stocks continues to catch most investors off guard. What is surprising is that this wasn't mentioned as a factor in the article above which stated the growth in global pension assets is attributed to hiring more qualified people to manage pensions, outsourcing portfolios and better investment choices (beta, not alpha, drives the growth in pension assets).

As far as allocations, was not surprised to see allocations to equities increased while allocations to bonds fell since the end of 2011. More investors are coming to terms with the fact that the bond party party is over. Many large global pension funds are following the Caisse and others, focusing on less liquid asset classes, and some worry that they are taking on too much illiquidity risk.

One big drawback of the Towers Watson study on global pension assets is that it doesn't take into account global liabilities too. I mention this because as global pension assets are hitting an all-time high, liabilities have continued to skyrocket with the net result being that global funding levels -- the only true measure of pension health -- are far from the pre-crisis levels even though they stabilized somewhat in 2012.

On this last point, I read an article from Fox Business last night written by Maarten van Tartwijk of Dow Jones stating that Pension Fund ABP to Trim Benefits:
The Netherlands' Algemeen Burgerlijk Pensioenfonds (ABP), one of the world's biggest pension funds, said Friday it will trim benefits this year to strengthen its capital position, a move that will affect hundreds of thousands of pensioners.

ABP said it will lower payments for the first time since it was founded in 1922, even after it reported strong investment results over 2012. The fund, which covers about 2.8 million active and retired government and education workers, warned it might cut benefits further in 2014 if its financial situation hasn't improved by then.

The Dutch pension industry, considered one of the most solid in the world, has been pressured by market volatility since the global financial crisis struck in 2008. After suffering heavy investment losses at the start of the crisis, it was later squeezed by the low-interest rate environment. The problems have been aggravated by the Netherlands' aging population, which forces the funds to put more money aside.

Many funds are now planning cuts in benefit payments to improve their capital position. Although the reductions are relatively modest, they will further eat into household spending power at a time of sweeping government austerity measures.

ABP reported a 13.7% return on investments over 2012, thanks to a rally in stocks and bonds. That lifted its total assets to 281 billion euros ($380 billion) by the end of December, making it the world's No. 3 pension scheme, after funds in Norway and Japan.

The investment gains couldn't offset the negative impact of low rates and higher life-expectancy rates. ABP's funding ratio--which measures assets relative to liabilities--stood at 96% at the end of December, below the 105% legal minimum.

"I can see it's hard to understand that we, despite good investment results, have to lower pensions," ABP Chairman Henk Brouwer said in a statement. "It was a painful and difficult decision."

The payment cut of 0.5% will take effect in April. The average pensioner with ABP receives EUR700 in retirement benefits each month, on top of the state pension. The cuts will lower benefits by around EUR3.50, ABP said.

The Dutch central bank, the sector watchdog, in September allowed pension funds to use a more favorable benchmark to calculate their liabilities, which would ease the strain on their capital buffers. A planned increase in the retirement age should also provide some comfort, according to experts.
In my opinion, the Dutch (and Danes) are ahead of  their global counterparts when it comes to prudent pension management. I'm a little concerned about the Dutch central bank allowing pension funds to use a more favorable benchmark and the shift to DC plans, but they still set the bar for everyone else.

When you see ABP cutting benefits for the first time since it was founded -- even if it's a modest cut -- it signals where the rest of the world is heading as it struggles to meet the demands of an aging population in an age of austerity. Importantly, looking only at global pension assets tells you nothing of the true health of global plans.

The same goes for Dow 14,000. While the surging stock market has boosted 401K plans and pension funds for many Americans, it's the top one percent who tend to get the biggest lift from significant stock market rallies. Meanwhile, nearly two-thirds of Americans between the ages of 45 and 60 say they plan to delay retirement because they don't have enough retirement savings to retire on decent terms.

Below, Ravitch & Rice Chairman Richard Ravitch discusses the different types of pension plans and the problems underfunded US public pension funds are facing coping with soaring pension deficits. He speaks on Bloomberg Television's "In The Loop."

One thing to remember, US corporate pension plans are not in better shape and DC plans are not the solution to America's retirement crisis as they leave individuals vulnerable to the whims and vagaries of public markets, failing to provide them with a stable amount like DB plans do, allowing them to retire in dignity.