UK pension scheme assets grew by 6.5% on average during the past decade, a survey by Willis Towers Watson claims.
This helps the ratio of UK pension scheme assets climb to 108% of GDP, up from 91% in 2006. This comfortably beats the 62% average in the 22 countries the Global Pension Fund Assets Survey examined, but puts the UK behind the Netherlands (168%), Australia (126%), Switzerland (123%) and the US (121%).
The UK joins the US and Japan as the world’s largest pension markets, collectively representing around 77% of the industry’s assets, the survey claims.
Driving this growth has been retirement scheme managers lowering their exposure to equities, turning instead to bonds and alternative assets to generate the desired long-term income. Shares accounted for 47% of portfolios at the end of 2016, compared to 64% in 2006. Bond allocation increased to 36% from 24% over the period.
The UK, along with Switzerland and Canada, had the lowest percentage allocation to domestic equities, compared to the US, which had the highest exposure to domestic companies. Overall, the Willis Towers Watson survey found that weighting of domestic equities fell on average to 43% at the end of 2016 from 69% in 1998.
Globally, defined contribution (DC) schemes were home to 48% of pension assets at the end of 2016, growing at 5.6% in the past 10 years. This beat the 2.6% improvement recorded by defined benefit (DB) schemes.
Willis Towers Watson’s global head of investment content, Roger Urwin, said pension asset growth was a result of equities and alternative assets performing better than expected.
“While funds in many countries have large pension outflows to deal with, it was encouraging to see overall asset values rise in the vast majority of countries covered in the study,” he added.
Urwin continued to explain that increased diversification through allocations to alternative assets and shifts from domestic equity markets is a sign that managing risk continued to be a focal point for pension funds. “An increasing number of funds are using more sophisticated liability hedging techniques, often referred to as liability driven investing,” he added. “With geopolitical events adding to existing uncertainty across regions, these are likely to be continuing trends. The key to success will therefore be in confronting global, regional and local risks, in addition to remaining on top of regulatory changes and improving governance practices.
“This study suggests that the key medium-term trends for pension funds continue to be: focus on risk, attention to governance, pensions design with DC models in the ascendant, pressure on talent, streamlining of the value chain and integrating ESG considerations,” Urwin said. “Each of these is a tough challenge, taken together they multiply to a pretty formidable agenda.”
