LONDON (Reuters) - 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.
Reporting by Sarah Mortimer; Editing by Helen Massy-Beresford