Pensions up alternatives exposure

Pension funds globally committed more than ever to private equity, real estate and other alternative asset classes during 2013.

Total pension fund assets in the 13 major pension markets globally increased by 9.5 percent during 2013, compared to 6.9 percent in 2012, reaching a new high of almost $32 trillion, according to the Global Pension Assets Study 2014 by Towers Watson.

For the largest seven markets, research also showed that allocations to alternative assets grew to 18 percent of total assets from just 5 percent in 1995. The largest increment was noticed in real estate.

Moreover, Asia Pacific pensions are showing increasing activity in public and private equities. 

Australian pension funds have increased their allocations to alternatives the most over the past decade, reaching 25 percent of their commitments from just 8 percent.

However, it is unclear how the recent pullback from private equity and other alternative asset classes in Australia, due to issues with fees and transparency, has impacted the country’s recent allocations.

Australia was followed by Canada and the UK, which have now reached a 21 percent and 14 percent allocation to alternatives respectively.

Japan, which has $3.2 trillion in pension assets, is gradually showing a shift from bond-related investments to more equity investments, consistent with the signals coming from Japanese investors that they are opening up to alternative assets such as private equity, infrastructure and real estate.

While Japanese pension funds still have the highest allocation to bonds globally (51 percent), this represents a significant reduction since 2003, when 71 percent of its assets were in bonds.

In comparison, equity allocations by Japanese pensions have risen to 40 percent in 2013 from 22 percent in 2003.

Japanese pension assets have been indicating an interest in increasing exposure to private equity.

The country’s Government Pension Investment Fund is the world’s largest pension fund, managing 121 trillion yen (€870 billion; $1.2 trillion) in retirement savings, and is now considering a move into alternative asset classes, a move that industry sources say will be followed by other domestic pension funds.

GPIF currently has no investments in alternative asset classes, but has been moving in that direction in order to increase returns as a large proportion of Japan’s population ages and contributions decline simultaneously.

Of all the 13 major markets studied, Japan is alone in the 14.5 percent decline in pension assets experienced between 2011 and 2012, with all other countries experiencing growth of between 2.6 percent (Brazil) and 16.3 percent (the Netherlands), according to the Towers Watson study. 

The US continues to be the largest market in terms of pension assets, followed, at significant distance, by UK and Japan. Combined, the three account for over 79.4 percent of total pension assets worldwide.