Global pension assets record 23% increase to RE allocations

After more than a decade of uninterrupted growth, global pension assets last year recorded their largest fall since the global financial crisis of 2008, according to the latest Global Pension Assets Study from WTW’s Thinking Ahead Institute, a global advisory, broking and solutions company.

The study shows that global pension assets now stand at $47.9 trillion, a fall of 16.7 percent in a year driven largely by a correction in both fixed-income and equity markets.

The United States remains the largest pension market, followed at a significant distance by Japan and Canada. Together, these three markets account for over 76 percent of pension assets in the 22 largest pensions markets (P22). The United Kingdom slid into fourth place, mainly due to losses incurred by pension funds with liability-driven investing strategies and the forced selling of gilts during a liquidity crisis.

Since 2002, overall equity allocations have shrunk from 50 percent to 42 percent, and similarly the allocation to bonds has decreased from 38 percent to 32 percent. Allocation to other assets (real estate and other alternatives) has increased from 9 percent in 2002 to an estimated 23 percent at the end of 2022. Traditionally the United States and Australia have had higher allocations to equities than the rest of the seven largest pensions markets (P7), while Japan, Netherlands and the United Kingdom have had higher allocations to bonds.

In many regions around the world, defined benefit (DB) pensions continued to diminish in the continuing shift to defined contribution (DC) plans. In the past 20 years, global DC assets have grown 7.2 percent per annum, compared with a 4.4 percent per annum growth rate for DB assets.

“Last year we experienced, to an extent, a global ‘polycrisis’ where various risks combined, were amplified as a result, and manifested in significant asset falls. It is our view that these systemic risks will increase in the future and will emanate predominantly from environmental, societal and geopolitical sources,” said Marisa Hall, head of the Thinking Ahead Institute.

“While many pension funds are focused on the long term, this situation presents short-term challenges that cannot be ignored. The main challenge is that accurate pricing of these risks is near impossible, as they have high uncertainty and low tractability, but their impact is likely to be broad and significant and will test organizational resilience.

“Our work with investors points to transition pathways focused on cleaner energy, fairer societies and greater accountability,” continued Hall. “As this landscape evolves, pension organizations will need to adjust their strategies and use adaptive capital to navigate these changes and build in future resilience.”