Hong Kong has had the largest increase in pension fund assets relative to the size of its economy during the last ten years out of all the thirteen major pension markets (the P13) in the latest Towers Watson’s Global Pension Assets Study. According to the research, total pension assets in Hong Kong rose from 14% of GDP in 1999 to 41% in 2009, representing an increase of 27%, whereas the pension assets-to-GDP ratio deteriorated in the US (-16%), Canada (-12%) and UK (-12%).

Naomi Denning, head of investment for Asia-Pacific at Towers Watson, said: “During the past ten years, the growth of Hong Kong retirement assets is largely attributed to the launch of the Mandatory Provident Fund Schemes in 2000 with cash inflows increasing every year. A recent decline in GDP in many markets and the rebounding of stock markets in 2009 help explain the relative improvement for Hong Kong, where schemes’ exposure to equities are higher than most pension markets.”

According to the research, the Netherlands and Switzerland achieved asset-to-GDP ratios higher than 100%, however, Switzerland’s ratio decreased by 10% from 1999 to 2009, while Netherland’s ratio increased by 17% during the same period. On average, the combined ratio of the P13 markets fell from 76% to 70% over the ten year period.

The study also showed that global institutional pension fund assets across the thirteen major markets in total increased by 15% during 2009, from US$20 trillion to over US$23 trillion. The growth is in sharp contrast to a 21% fall in asset values during 2008 and brought assets back to 2006 levels. In the P13, Brazil was the fastest growing pension market in 2009 with a CAGR of 54%, followed by Hong Kong (23%) and Australia (9%), as measured in local currencies.

Naomi Denning said: “The global financial crisis was a huge wake-up call and problems of poor systemic design in the industry point to increased likelihoods of further periods of financial distress in the future. While the recovery of markets will be welcomed, it is hoped that it will not stifle recognition of these as major issues for governments and companies to address. I fear that without exceptional leadership we will have another tough decade in the pension and investment world.”

Other highlights from the report include:
Global asset data for the P13
• On average global pension assets (measured in local currency) grew by over 16% in 2009, compared with an 11% fall in 2008, improving the ten-year average growth rate to almost 7%;
• Despite losing market share in the past ten years, the US, Japan and the UK remained the largest pension markets in the world, accounting for 57%, 14% and 8% respectively of total pension global fund assets;
• All countries saw significant growth in pension assets in 2009 (measured in local currency), contributing to a positive growth rate over the last five years. The exception is Japan, where the growth in 2009 was not sufficient to provide positive growth over the last five years;
• In terms of ten-year CAGR (in local currency terms), these are mostly positive,
with Brazil (18%), Hong Kong (14%), the Netherlands (12%) and Australia (10%) having the highest and Japan (1%), Switzerland (2%), US (3%) and the UK (3%) having the lowest;
• The Netherlands now has the largest proportion of pension assets to GDP (120%), followed by Switzerland (113%) and Australia (93%).

Asset Allocation for the P7
• Bond allocations for the P7 countries increased from 25% in 2005 to 32% in 2008, but fell back to 27% in 2009. Allocation to equities rose significantly during 2009 to reach 54%;
• Other assets, especially real estate and to a lesser extent hedge funds, private equity and commodities, have grown from 12% to 17% in the last five years.

Naomi Denning said: “The gyrations of markets during the past few years has presented pension funds with very difficult strategic asset allocation choices. During the crisis, some funds sold out of equities to address solvency issues, some drifted out of equities and into bonds by not rebalancing, while others maintained their strategic mix and rebalanced to prior equity percentages. The result overall was a phase of de-risking, although often not in a measured way, and this has largely been reversed as equity markets have rebounded and risk allocations rebuilt.”

Defined Benefit (DB) vs. Defined Contribution (DC) for the P7
• During the ten-year period from 1999 to 2009, the CAGR of DC assets was 6% against a rate of 2% for DB assets;
• DC assets now comprise 42% of global pension assets compared with 32% in 1999;
• Australia has the highest proportion of DC pension assets, having increased them from 78% to 82% of overall assets between 1999 and 2009;
• The countries that show a larger proportion of DC assets than DB assets are the US, Australia and Switzerland while Japan and Canada are close to 100% DB.

Naomi Denning said: “As a result of the crisis there is a heightened awareness of the need to be better prepared in future and to think differently about how markets can be buffeted by extreme events. An important characteristic of this new environment is the acknowledgement by asset owners of much increased complexity and the recognition that the appropriate governance for a chosen investment strategy is critical. This will increasingly lead investors to either prioritising higher governance and allocating proportionate resources or simplifying their investment strategies to minimise cost and avoid value destruction. This will become all the more important as pensions and financial services regulators seek to spell out what governance standards funds should adhere to and their broader responsibilities. Funds in the past have had a very light touch applied on these issues, but the massive size and sphere of their influence make pension funds ripe for greater regulatory influence.”

Footnote:
• The P13 refers to the 13 largest pension markets included in the study which are Australia, Canada, Brazil, France, Germany, Hong Kong, Ireland, Japan, Netherlands, South Africa, Switzerland, the UK and the US. The P13 accounts for more than 85% of global pension assets;
• The P7 refers to the 7 largest pension markets (over 94% of total assets in the study) and excludes Brazil, Germany, France, Ireland, Hong Kong and South Africa;
• All figures are rounded and 2009 figures are estimates;
• All dates refer to the calendar end of that year.