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Pension fund assets reach new US$23.6 trillion record

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Dan Edwards
Dan Edwards
Dan Edwards has been with Alpha Southeast Asia since 2013 and edits both print and online versions of the magazine. He wrote the award-winning story ‘spotlight on unclarity’ soon as after joining Alpha Southeast Asia. He is based in Singapore. Disclosure: I have no direct investment holding in any stocks or bonds in Indonesia , and no plans to initiate any positions within the next 96 hours. The opinion expressed in this article is my own. I have no commercial relationship with any company cited on this website nor am I receiving any compensation from anyone except from Alpha Southeast Asia, controlling shareholder of www.whatinvestorswant.com

Assets under management (AUM) at the world’s top 300 pension funds increased by 8.9% to reach a new record, now totalling US$23.6 trillion in 2021, according to the annual research conducted by the Thinking Ahead Institute, in conjunction with Pensions & Investments, a leading U.S. investment newspaper. The research highlights high-level trends in the pension fund industry and provides information on the changing characteristics of these funds.

While total AUM has reached record highs, growth has slowed from 11.5% in 2020 to 8.9% in 2021. This was to be expected after a very strong performance in asset markets over 2020. However, the latest performance is enough to take five-yearcumulative growth to 50.2% in the period between 2016-2021.

Marisa Hall, co-head of the Thinking Ahead Institute, reflects on key insights from the research: “This is a story of two halves. On the one hand, a new record for the world’s major pension funds illustrates the optimism that defied a global pandemic. Yet on the other, growth is slowing and the long-term dashboard is flashing amber.

Looking ahead, rising inflation and subsequent central bank action are likely to cause global growth to falter, which may in turn endanger longer term the funding status of pension funds.”

“Pension funds are also under immense governance pressure from all sides, with a growing politicisation of ESG in some regions meeting calls for more substantial and urgent climate action. The addition of stark short-term economic pressures alongside these structural long-term changes will only add to the difficulty of balancing short-term financial resilience with long-term financial and climate sustainability.”

North America now accounts for 45.6% of assets of the world’s 300 largest pension funds. This is up from 41.7% at the end of 2020. European pension funds account for 25.9% and Asia Pacific (APAC) at 25.5%, with the remaining 4% from Latin America and Africa.

The United States (US) now accounts for 39.6% of top 300 pension fund AUM and has almost half the funds in the ranking, with 148. After the US, the countries with the largest number of pension funds in the ranking are the United Kingdom (UK) (23), Canada (18), Australia (15), the Netherlands (12) and Japan (11). Since 2016, a total of 37 new funds have entered the ranking, with the US accounting for the highest net gain (14 funds) and Japan the highest net loss (5 funds). During the same period, the UK had a net loss of three funds, while Switzerland had a net gain of three funds.

Among the top 300 funds, Defined Benefit (DB) fund assets continue to dominate at 63.5% of the total AUM. However, the share of DB fund assets has been declining modestly over the years. 

DB schemes continue to account for a majority share of assets in North America (72.7%), APAC (65.2%), and Europe (51%). However, DC plans dominate in other regions (60%), particularly in Latin American countries. In terms of the overall trend, DB’s share of assets has fallen slightly in Europe and North America but has increased in APAC and other markets, reflecting the relative maturity and demographic profile of pension funds in these markets.

According to the research, the top 20 pension funds now constitute 41.0% of the total assets, slightly down from the prior year (41.8%) having grown 6.6% during the year compared to 8.9% for the top 300 funds. However, on a longer-term basis, the top 20 have a higher growth rate, with a Compound Annual Growth Rate (CAGR) for the last five years of 8.8% versus 8.5% for the top 300 funds. APAC funds in the top 300 experienced an annualised growth of 8%.

On average, the top 20 funds invested approximately 53.5% of their assets in equities, 27.9% in fixed income securities and 18.6% in alternatives and cash. In APAC, the share of pension funds in the top 20 fell from 43.7% to 41.7% in 2021. This is partially due to the difference in asset allocation, where North America and European pension funds had higher allocations to equities, and alternatives & cash relative to APAC, which had a higher allocation to bonds. Risky asset returns were strong in 2021, and this can be observed in the year-on-year change in asset weights.

In the case of APAC, equity allocations went up from 43.3% to 48.8% and alternatives & cash allocations increased from 3.4% to 5.7%. This is a combination of APAC funds allocating more to these asset classes, as well as strong investment returns from these asset classes over the period. However, APAC funds still have a long way to go before they reach similar levels with their peers in North America and Europe.

Jayne Bok, Head of Investments, Asia, at WTW says: “It’s encouraging to see APAC funds so well represented in the top 20 funds. They have shorter histories than their western counterparts, but they are growing rapidly, and the asset allocation continues to evolve over time. There is still room for improvement in terms of reducing home bias, achieving true diversification and greater portfolio efficiency, and doing more to integrate ESG into the investment process. However, I also want to recognise the huge amount of progress made so far. As these funds continue to grow in scale, they will have more scope to lean into their strengths and focus on honing their competitive advantages.”

The Government Pension Investment Fund of Japan (GPIF) remains the top pension fund, leading the AUM ranking with over US$ 1.7 trillion. It has remained in the top spot since 2002. The National Pension Fund in South Korea (3rd) maintained the same position as last year’s ranking, while China’s National Social Security has moved down by two places (8th) this year. The Central Provident Fund in Singapore retains its position (9th) in this year’s ranking. 

Marisa Hall concludes: “We’re seeing asset allocation continue to respond to long-term structural shifts. While allocations to private markets declined compared to the previous year, we believe this was mostly caused by shorter-term inflationary and rate-hike fears. We expect private markets will continue to expand considerably in the investment space over the long term, reflecting a need for new primary investment to support new models of sustainable economic growth.”

“Pension fund boards’ agendas have rightly become a guide to the complex strategic challenges facing global markets and economies. Reading the annual reports of the world’s very largest pension funds is also a lesson in potential solutions to these major challenges. The majority are concerned about growing market volatility and discussing further ways to boost the diversity of their investments, specifically in the context of global economic slowdown. And most are now campaigners for best practice in corporate governance, aimed at ensuring sustainable value.”

“It’s clear that pensions can be a force for good to contribute to overcoming the substantial challenges in the world, but also a barometer of major questions we all face over the coming decades.”

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