Despite 'weakly designed' DC plans, DC assets outpaced global pension assets
New pension assets study from Willis Towers Watson’s Thinking Ahead Institute confirms what many have observed and offers new insights.
The growth rate for defined contribution assets has increased while that of defined benefit assets has decreased, according to the Global Pension Assets Study from Willis Towers Watson’s Thinking Ahead Institute.
It found that assets in global institutional pension funds in the 22 major markets dropped 3.3 percent over the course of the year in 2018, hitting $40.1 trillion at year end.
And defined contribution assets, the report said, account for more than half of total assets across the seven largest pension markets for the first time.
But it also found that, growth of defined contribution plans notwithstanding, DC plans are “still weakly designed, untidily executed and poorly appreciated. …”
So even though DC assets have grown at a faster pace than defined benefit plans over the past 10 years—the former at 8.9 percent and the latter at 4.6 percent—the report adds, “it will take better design and engagement models to create meaningful contributions to retirement security.”
The outstripping of DB by DC plans isn’t the only change; Asset allocation has moved away from equities since 1998, falling 20 percentage points, with investments in other assets rising 19 percentage points during the same time period.
Still, at 47 percent and 43 percent respectively, the U.S. and Australia have higher allocations to equities than the rest of the P7 markets (the seven largest markets for pension assets: Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S.), while the Netherlands, the U.K. and Japan have above average exposure to bonds and Switzerland has the most even allocations across equities, bonds and other assets.
The U.S. is still the largest pension market, representing 61.5 percent of worldwide pension assets. The two next largest markets are Japan, at 7.7 percent, and the U.K., at 7.1 percent.
The report also says that private markets saved the 2018 results from being much worse for the P7 (already the worst in the last 20 years); in fact, it says, private markets, “given their 20 percent or so allocation and with their positive returns[,] … produced important risk diversification.”
Over the next 5–10 years, it adds, pension funds will have to consider a range of issues that include a continued move to DC; a bigger impact from evolved regulations; challenges in governance issues; strategy changes to incorporate sustainability, ESG, stewardship and long-horizon investing; and the rise of technology and the changes it will bring about.
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