Global pension assets move towards defined contributions

Global pension asset values had little change in 2015 but a study has found six areas of change for the sector.

Willis Towers Watson's Global Pension Assets Study found a move in pension design towards defined contributions, the demands on investment talent, the internal focus to the pension funds' value chain, governance improvements, increased risk management focus, and the increased consideration of sustainability and environment, social, and governance (ESG) assets.

The global adviser found Australia and the US had the largest proportion of DC assets.

The study said DC assets grew rapidly for the 10-year period to 2015, with a compound annual growth rate of seven per cent, against a rate of just over three per cent for defined benefit (DB) assets.

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In 2015, Australia had the highest proportion of DC to DB assets at 87 per cent to 13 per cent. This was followed by the US at 60 per cent to 40 per cent.

Willis Towers Watson's global head of investment content, Roger Urwin, said DC funds remained handicapped by the limitations in governance models, risk-sharing models, and investor understanding.

"We remain concerned that pension provisions will fall well short of member expectations based on a central investment outlook for decidedly skinny returns which is compounded by relatively low contribution rates," Urwin said.

"On top of capital market risks there remain large risks of regulation and governance mismanagement."

The study also found allocations to alternative assets in larger markets had grown from five per cent to 24 per cent since 1995, and an increased globalisation in equities.

Equity home bias decreased with the weight of domestic equities in pension portfolios falling on average from 65 per cent in 1998 to 43 per cent in 2015.

However, Australia had increased exposure to domestic bonds by seven per cent in the past two years.

"Asset diversification into alternatives and the shift away from domestic equities have gained momentum among pension funds around the world, as these strategies have helped to manage risk," Urwin said.

"The persistent economic uncertainty is likely to reinforce these shifts."