The good times appear to have resumed in 2016 for the world's largest asset owners, with the latest survey by Pensions & Investments and Willis Towers Watson PLC showing assets of the 300 largest retirement funds growing 6.1% to $15.73 trillion.
Thanks in large part to strong gains in equity markets, the 20 largest funds in the world grew 7.1% to $6.35 trillion for the year ended Dec. 31, increasing their relative size to 40.3% of total assets.
The MSCI All Country World index was up 7.87% for the year, with the U.S. stock market showing particular strength. The Russell 3000 gained 12.74% in 2016, in sharp contrast to the MSCI Europe's loss of 0.4%.
The 2016 figures compare to a 3.4% decline in total assets for 2015 and a 2.2% drop among the top 20 asset owners that year. In 2015, the 20 largest funds accounted for 40% of total assets.
But behind strong investment gains is a less positive story when it comes to plan deficits — something the study does not address.
"Positive equity returns by and large have kept these funds doing well, but solvency has been under a lot of pressure," said Roger Urwin, global head of investment content at Willis Towers Watson in London. "The vast majority of pension funds are underfunded."
With the expectation that interest rates will increase, which comes with higher discount rates, Mr. Urwin said plans "will stage something of a recovery ... but it won't necessarily do enough to put them into a very solid state. I wouldn't expect most pension funds to be in a solid state in five years time."
Also weighing on plan executives' minds is longevity, according to excerpts from some of the top 20 funds' annual reports for 2016 and Mr. Urwin. Recent discussions regarding participants' longevity are that improvements in life expectancy have "hit something of a plateau, but on the other hand a lot of that improvement is just working its way through the underlying mathematics of pension plans," Mr. Urwin said.
Plan executives cited in the survey highlighted both positive markets and the challenges they are facing.
Nine of the top 20 pension funds in their annual reports emphasized increased volatility and uncertainty in global markets in 2016, referencing the U.K. vote to leave the European Union on June 23 and the election of U.S. President Donald Trump in November.
Eight funds highlighted that positive equity returns drove their results, with strong growth in the second half of 2016. However, eight funds also said returns had been affected by the continued low interest rates, and 13 said portfolio diversification is a key strategy for their investment performance.
Concerns over longevity and the impact of aging populations were highlighted by seven funds as potential threats for the sustainability of retirement plans.
Overall, Mr. Urwin said: "The 300 is reasonably stable, and tells a story about organizations that have, by and large, strong governance and are making their way more confidently, but into more headwinds than they've had before. (They are) all stronger than five years ago, but having to deal with more adverse conditions."
Bigger gains in North America
Growth rates differed across the globe. North America-based funds retained the lion's share of the top 300 assets, taking 44.1% of total assets in 2016, up from 43.6% in 2015. The region's funds recorded annualized growth of 6.7% over the five years to year-end 2016.
Asia-Pacific funds grew at an annualized 2.8% over the same five-year period, and increased their share of total assets to 26.1%, up from 25.1% a year earlier.
Europe, however, saw its share fall, to 26.1% from 27.6%. The region's asset growth rate was an annualized 3.1% for the five-year period.
Mr. Urwin also highlighted the growth of public and state funds in the top 300, which have grown at the expense of corporate plans in the past few years.
In 2016, public-sector plans accounted for 40%, or $6.3 trillion of total assets, up from 39% in 2015. Sovereign funds accounted for 28% of assets, flat for the year but rising in terms of value to $4.47 trillion from $4.2 trillion.
Corporate plans saw their share fall to 18% from 19%, although by value assets grew to $2.86 trillion from $2.77 trillion. The remaining 14% was private independent plans, which saw no growth though assets rose to $2.12 trillion from $2.01 trillion in 2015.
Equities still a force
The asset allocation of the 20 largest funds shows a higher allocation to equities and to alternatives and cash, at the expense of bonds. The simple average portfolio of the top 20 shows 41.7% were invested in equities vs. 40.8% in 2015. The bond allocation fell to 37.2% from 39% a year previous, while alternatives and cash took the remaining 21.1% of assets, up from 20.3% in 2015.
Using a weighted average of the allocations, both equities and alternatives again took higher exposures. The equity allocation was 44.2% in 2016, up from 43.3% in 2015, and the alternatives and cash allocation grew to 18.2% from 16.8%. The allocation to bonds fell to 37.6%, from 40%. Mr. Urwin said there will be areas in the world, however, where bond allocations will still be high due to the use of liability-driven investing programs.
Regarding the increased equities exposure, Mr. Urwin said it could be that some funds have allowed their allocations to "drift" a little, meaning deviations from strategic benchmarks may have increased equities exposure.
But he added funds are generally split into two camps: "One is those that really are trying to stretch very hard for extra return because they feel squeezed and they're under pressure — in order to do well they have to take a certain amount of risk, which is consistent with having more in equities."
He said some large funds have been open about the fact they are exploring bigger commitments to equities.
The other camp are those funds that are more mature, with some pension funds becoming "conscious of the merits of managing risk, reducing risk, containing risk, and that usually involves a program" of LDI. "That approach is still very much a minority of the 300, but has grown," added Mr. Urwin.
By region, the nine North American funds in the top 20 reduced their allocations to both equities and bonds during the year. Equities fell to 46.5% exposure, from 46.8% in 2015. Fixed-income allocations were 18.8%, down from 19.3%. Alternatives and cash took up the balance, growing to 34.7% from 34%.
Among the six Asia-Pacific funds, equities allocations grew to 39.2% from 37.7% a year previous. Alternatives and cash exposure grew to 6.6% from 4.3%. Growth was at the expense of bonds, where allocations fell to 54.2% from 58.1% in 2015.
The remaining five funds, based in Europe and other regions, saw equity allocations grow to 48.3% from 46.9%. Alternatives and cash allocations grew to 14.4% from 14% a year previous, and fixed-income exposure fell to 37.3%, from 39.6% a year previous.
P&I/Willis Towers Watson World 300: The largest retirement funds
Ranked by total assets, in millions. U.S. fund data are from the P&I 1,000, published Feb. 6, 2017; non-U.S. fund data are as of Dec. 31, 2016, unless otherwise noted.
Notes: 1 As of March 31, 2017;
2 As of March 31, 2016;
3 As of Jan. 1, 2017;
4 Global figure (ex-U.S.);
6 Global figure;
7 As of May 31, 2017;
8 As of Jan. 31, 2017;
9 As of Sept. 30, 2016;
10 As of June 30, 2016;
11 As of April 30, 2017;
12 As of Feb. 25, 2017
Note: The defined benefit and defined contribution breakouts were not available or applicable to all non-U.S. funds.