Asset growth helped strengthen pension fund balance sheets in 2012 and the ratio of global assets to GDP is just below the level reached in 2007. According to the study, pension assets now amount to 78 percent of global GDP, which is significantly higher than the 72 percent recorded in 2011 and substantially higher than the 61 percent recorded in 2008.

"Given the extreme economic and market volatility we have experienced during the past five years it was a relief for many pension funds to finish the year in better shape than when it started, for a change," said Carl Hess, global head of investment at Towers Watson.  "While volatile markets are expected to continue for the foreseeable future, pension funds are now generally better equipped to deal with them.

"During the past five years we have seen many funds deal with their governance shortfalls and, as a result, a growing number of funds have either more qualified people working on their investments or they have outsourced the running of all or part of their portfolios to third parties. In addition, pension funds are implementing investment strategies that are more flexible and adaptable and which contain a broader view of risk so as to make greater allowance for extreme events."

The study also found that the 10-year average growth rate of global pension assets is more than 8 percent. All markets in the study have positive ten-year compound annual growth rate (CAGR) figures (in local currency). The largest pension markets are in the U.S., Japan and the United Kingdom, with 57 percent, 13 percent and 9 percent of total pension assets, respectively.

In terms of ten-year CAGR figures (in local currency terms), Hong Kong and Brazil have the highest growth of 14 percent followed by South Africa (13 percent) and Australia (11 percent). The lowest are Japan (2 percent), France (2 percent) and Switzerland (4 percent)

Ten-year figures (in local currency) show the UK and Netherlands have both grown their pension assets the most as a proportion of GDP by 42 percent to reach 112 percent and 156 percent of GDP respectively, followed by Australia (up 32 percent to 101 percent of GDP), the U.S. (by 24 percent to 108 percent of GDP) and Hong Kong (up 23 percent to 40 percent of GDP). 

During this time South Africa's ratio of pension assets to GDP has fallen by 2 percent to 64 percent of GDP.

As far as asset allocations are concerned, bond allocations for the seven largest pension markets included in the study have decreased by 7 percent in aggregate during the past 18 years (40 percent to 33 percent). Allocations to equities have fallen by 2 percent (to 47 percent) during the same period.

Equity allocations in the UK have fallen from 61 percent in 2002 to 45 percent in 2012.  In the Netherlands allocations fell from 37 percent to 27 percent, during the same period, while Canada's allocation to equities fell from 51 percent to 43 percent. Australia maintains the highest allocation to equities at 54 percent, followed by the U.S. at 52 percent, while the Netherlands overtakes Japan (55 percent) as having the highest allocation to bonds of 57 percent.

Allocations to other (alternative) assets, especially real estate and to a lesser extent hedge funds, private equity and commodities, for the P7 markets have grown from 5 percent to 19 percent since 1995.

In the past decade most countries have increased their exposure to alternative assets, with the UK increasing them the most (from 3 percent to 17 percent), followed by Switzerland (18 percent to 30 percent), Canada (13 percent to 23 percent), the U.S. (from 10 percent to 20 percent) and Australia (14 percent to 23 percent). Allocations to alternatives have fallen in the Netherlands from 19 percent to 16 percent during the same period.

From 2002 to 2012, the CAGR of defined contributions assets was 8 percent against a rate of 7 percent for defined benefit assets. Defined contribution assets have grown from 43 percent in 2002 to 45 percent in 2012.

According to the study, Australia has the highest proportion of DC to DB pension assets: 81 percent to 19 percent.

The United States and Australia have a larger proportion of DC assets than DB assets, while Japan is close to 100 percent defined benefit. The Netherlands and Canada, historically only DB, are now showing signs of a shift toward DC, with 6 percent and 4 percent of assets in DC plans.

According to 2011 figures, 65 percent of pension assets for the seven largest markets are held by the private sector and 35 percent by the public sector.  In the UK and Australia, the private sector holds the biggest portion of pension assets, accounting for 89 percent and 84 percent respectively of total assets in 2011

Japan and Canada are the only two markets where the public sector holds more pension assets than the private sector, holding 73 percent and 57 percent of total assets respectively.

Towers Watson is a global professional services company that helps organizations improve performance through effective people, risk and financial management.