Global Pension Funds Industry| Growth, Trends, and Forecast (2020 - 2025)
Pension fund schemes invest with a long-term investment perspective in line with the duration of their liabilities. Pension funds are adapting their investment strategies to succeed in today's complex and demanding environment.
Pension funds traditionally invested in bonds and equities with long term investment horizon and given the market volatility they have diversified their portfolios by allocating funds to alternatives like hedge funds, private equity, real estate, and others. Recent years have witnessed intense pension reform efforts in countries around the globe, often involving increased use of funded pension programs managed by the private sector. These funded arrangements are likely to play an increasingly important role in delivering retirement income in many countries and privately managed pension assets will play an increasing role in financial markets, notably as a source of long-term savings.
The financial assets of pension funds remained largely unchanged in 2018 compared to 2017. Pension funds grew by 0.4% in 2018 to $35.6 trillion, significantly below the sector’s annual average growth of 6.3% between 2012 and 2017. The slowdown in the growth of financial assets held by pension funds was a common trend in most advanced economies, including the US which represents 63% of global pension fund assets. However, pension fund assets grew rapidly in some EMEs, such as China (at 20%) and India (at 34%).
In 2019, the pension fund assets were impacted by the downturn on equity markets in 2018, recording the worst financial performance in a year for pension funds across many countries since the 2008 financial crisis.
Key Market Trends
Distributed Contribution Plans are Settling as Dominant Global Model
In 2019, the total Defined Contribution (DC) assets across the aggregate of the six largest pension markets in the world exceeded Defined Benefit (DB) assets for the first time. Over the decade to 2019, we continue to see DC assets continue to grow at a faster rate than DB (8.4% pa vs 4.8% pa) reflecting increased member coverage and in some markets higher contributions.
Along with a rise in the distributed contribution assets, there remain certain challenges like member engagement for employers. Targeted engagement provides better insights but faces challenges in execution. Advances in technology are opening up new possibilities for customization, changing the nature of member interactions, and re-setting member expectations. The future of DC is likely to be hyper-customized, with increased focus on individual participants, but employers need to improve governance to embrace this.
Key Trends in Asset Allocation of Pension Funds
The asset allocation to real estate, private equity, and infrastructure in the 20-year period has moved from about 6% to almost 23%. Alternatives have been attractive for return reasons, offsetting their governance difficulties.
We continue to see a rise in allocations to private markets and other alternatives at the expense of equities and bonds, reflecting the demand for risk diversification. Investors continue to look for innovative ways to evolve their mandates to better manage the agency, measurement, integration, and complexity challenges involved with private markets.
The report includes an overview of the largest pension funds and a few corporate funds operating pension schemes worldwide. Currently, some of the major players dominating the market studied, in terms of asset size are discussed in detail in the report.
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