Japanese pension funds'international diversification will soar to 21% of total assets within five years, pouring an additional $233 billion into global capital markets by the end of 2001, according to projections by InterSec Research Corp.
Overall, officials at Stamford, Conn.-based InterSec project globalization of pension assets will continue their relentless course upward. The consulting firm anticipates 17% of global pension assets will be invested cross-border within five years, worth some $2.31 trillion.
That dollar figure is twice the level of non-domestic pension fund investments at the end of 1996 and six times the pension assets invested overseas from just five years ago.
U.S. pension assets, which at $4.35 trillion represented slightly more than half of the world's $8.5 trillion in retirement assets at the end of 1996, have the largest overseas investments. InterSec officials estimate U.S. pension funds had $475 billion invested abroad at the end of last year. (See related story on page 14.)
That figure will nearly double to $940 billion within five years, the consulting firm estimates. (The proportion of U.S. pension assets funneled overseas will rise to 14% from 11% during that period.)
Japan's growing global investments, spurred by liberalization of investment rules and poor performance in domestic markets, represents the most dramatic increase in international asset allocations in InterSec's annual estimates.
By the end of last year, 15% of Japan's $1.14 trillion in pension assets were invested abroad - up from only 8% of a $699 billion base just five years earlier.
A move toward 21% of assets invested internationally means Japanese pension funds will have upped foreign investments nearly sevenfold since the end of 1991.
This will create new opportunities for non-Japanese money managers, who finally have started feeding at the Japanese pension trough after many frustrating years.
"There will be real opportunities for foreign-owned managers to pick up business there," said Stephen Oxley, vice president in InterSec's London office.
InterSec officials estimate 24% of Japanese private pension assets will be invested overseas by the end of 2001, up from 19% at the end of last year.
But projections for Japanese public funds will spike the punch: InterSec forecasts these funds will invest 18% of assets abroad within five years, up 50% from the proportion invested overseas at the end of 1996. The Japanese market is almost evenly split between private and governmental pension assets.
Elsewhere, InterSec officials forecast:
European pension assets will grow 62% during the next five years, hitting $3.6 trillion by the end of 2001. U.K. pension assets comprise nearly half of that total, growing to $1.8 trillion by the end of 2001 from $1.06 trillion at the end of last year. InterSec analysts believe the U.K.'s 1995 Pensions Act will boost private pension contributions in the next several years.
Recent legislation encouraging development of pension funds in Europe have had a marked effect. In particular, industrywide defined contribution plans will emerge in Italy.
"Italy is the one where you will see the most action first," Mr. Oxley said. Italian pension assets are projected to rise to $127 billion over the next five years from $80 billion at year-end '96.
Growth in France, Spain and Germany is expected to be slower, he said.
Cross-border investments by European pension funds will hit 22%, up from 18% at the end of 1996 and 12% at the end of 1991.
Propelling that growth will be rising allocations to international investments within the United Kingdom, the Netherlands and Switzerland.
U.K. pension funds are projected to increase foreign investments in 2001 to 29% of assets from 26% last year; the level of foreign investments will rise to $525 billion, double the $272 billion figure reached at the end of last year, according to InterSec projections.
Hong Kong will remain the country with the highest level of foreign pension investments, edging up to 68% from 65%, the consultant estimates.
Infant Latin American pensions systems will double to $233 billion over the next five years, with international allocations reaching 2% of assets from a base of zero.
Similarly, pension systems in Africa and the Middle East will grow to $321 billion from $155 billion - two-thirds of which comprises South African pension funds. Pension funds in that region also are expected to make their first incursions into international investment, going to 2% from zero.
