Assets at US institutional pension funds increased 12% in 2013 to a record US$18.9 trillion, according to Towers Watson’s annual Global Pension Assets study.

According to the research, global institutional pension fund assets in the 13 major markets grew by 9.5% during 2013 (compared to 6.9% in 2012) to reach a new high of almost US$32 trillion.

The growth is the continuation of a trend that started in 2009, when assets grew 18%, and in sharp contrast to a 22% decline during 2008, when assets fell to around US$20 trillion. Global pension fund assets have now grown at an average of over 6.7% annually since 2003.

The study reveals that the growth in assets helped to strengthen pension fund balance sheets globally during 2013, with 10-year figures showing the US grew its pension assets by 27% to reach 113%. The ratio of global assets to global gross domestic product (GDP) is at its highest level since the research began.

According to the study, pension assets now amount to around 83% of global GDP, a large rise from the 76% recorded in 2012 and substantially higher than the 57% recorded in 2008.

Chris DeMeo, head of Investment for the Americas, Towers Watson, said: "During 2013, equities enjoyed their best calendar year of risk-adjusted returns since the financial crisis, and as a result, U.S. pension funds are in their best shape in many years. The global economic recovery continued to gain momentum throughout 2013, thanks to the absence of major negative events and a stream of positive economic news. After such a long period of financial retrenchment and uncertainty, this is extremely encouraging. Generally, U.S. pension funds are now implementing investment strategies that are more flexible and adaptable, and contain a broader view of risk to make greater allowance for the sort of extreme economic and market volatility they have experienced during the past five years. This is just as well, because the global economic recovery — and the implied normalization of market conditions — is by no means guaranteed."

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Other highlights

Asset data for the US in 2013:

• The ratio of US pension assets to GDP increased from 86% in 2003 to 113% in 2013.
• About 20% of assets in the US were allocated to alternative investments in 2013.
• Equity allocations for US pension funds increased from 54% in 2008 to 57% in 2013.

Global asset data for the P13 in 2013:

• The 10-year average growth rate of global pension assets (in local currency) is just under 8%.
• The largest pension markets are the US, the UK and Japan with 59%, 10% and 10% of total pension assets, respectively.
• All markets in the study have positive 10-year compound annual growth rate (CAGR) figures (in local currency).
• In terms of 10-year CAGR figures (in local currency terms), South Africa has the highest growth rate (over 14%), followed by Hong Kong (12%), Australia (12%), the UK (11%) and Brazil (11%). The lowest CAGR figures are Switzerland (5%), France (1%) and Japan (1%).
• 10-year figures (in local currency) show the U.K. grew its pension assets the most as a proportion of GDP (increasing 64%, to reach 131%), followed by the Netherlands (up 56%, to 170% of GDP) and the U.S. (up 27%, to 113% of GDP).
• During this time, Japan’s ratio of pension assets to GDP has fallen by 3%, to 65% of GDP, and Brazil’s and France’s ratios each fell by 2%, to 13% and 6% of GDP, respectively.

Asset allocation for the P7:

• Bond allocations for the P7 markets have decreased by 12% in aggregate during the past 19 years (from 40% to 28%). Allocations to equities have fallen by 3% (to 52%) during the same period.
• Equity allocations by Japan pension funds have risen from 22% in 2003 to 40% in 2013, while equity allocations by U.K. pension funds have fallen from 65% to 50% in the same period. The Netherlands’ equity allocations fell from 40% to 35%, and Canada’s allocation to equities fell from 55% to 48%. U.S. and Australia pension funds have maintained the highest allocation to equities over time, reaching 57% and 54% in 2013, respectively.
• Japan pension funds still have the highest allocation to bonds (51%), but this represents a significant reduction since 2003, when 71% of its assets were in bonds. Netherlands pension funds have increased their allocation to bonds during this period (from 45% to 50%), as have U.K. funds (31% to 33%) — the only two countries in the study to have done so.
• Allocations to alternative assets, especially real estate (and to a lesser extent, hedge funds, private equity and commodities), for the P7 markets have grown from 5% to 18% since 1995.
• In the past decade, most countries have increased their exposure to alternative assets, with Australia increasing the most (from 8% to 25%), followed by Canada (from 8% to 21%) and the U.K. (from 3% to 14%). Allocations to alternatives in the Netherlands and Switzerland have remained constant during the same period.

"Since our research began in 1998, there is a clear sign of reduced home bias in equities, with the average weight of domestic equities in pension fund portfolios falling from around 65% in 1998 to just over 44% in 2013. Perhaps surprisingly, during the past 10 years, U.S. pension funds remained the market with the highest bias to domestic equities, while Canadian funds have had the lowest allocation to domestic equities. Regarding home bias in fixed-income investments, the average allocation to domestic bonds as a percentage of total bonds has remained high since the inception of this research, when it was over 88%. Last year, it was around 80%," said DeMeo.

Defined benefit (DB) and defined contribution (DC) for the P7:

• During the 10-year period from 2003 to 2013, the CAGR of DC assets was 9%, compared to 5% for DB assets.
• DC pension assets have grown from 38% in 2003 to 47% in 2013.
• Australia has the highest proportion of DC to DB pension assets: 84% to 16%, compared to 83% to 17% in 2012. Only Australia and the U.S. have a larger proportion of DC assets to DB assets.
• Japan, Canada and the Netherlands are markets dominated by DB pensions, with 97%, 96% and 95% of assets, respectively, invested in these types of pensions. Historically only DB, these markets are now showing small signs of a shift toward DC.

"The recovery of U.S. pension plans gives the government, plan sponsors and fiduciaries important breathing room to implement nascent structures for delivering good DC-type retirement plans. They have taken bold steps to provide for those persuaded to save. However, the pressure is on to ensure they are enrolled in well-designed, well-managed retirement plans. New participants’ expectations are high and immediate, but in order to meet these, there should be no lack of diligence to achieve the three most important goals for delivering effective DC plans: good governance, scale and alignment of interests," said DeMeo.

Public versus private sector pensions in 2012 (no estimates available for 2013):

• 66% of pension assets of the P7 group are held by the private sector and 34% by the public sector.
• In the U.K. and Australia, the private sector holds the biggest portion of pension assets, accounting for 88% and 84%, respectively, of total assets in 2012.
• Japan and Canada are the only two markets where the public sector holds more pension assets than the private sector, holding 71% and 55% of total assets, respectively.

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