STAMFORD, Conn. -- International investment by pension funds worldwide will grow 78% during the next five years, hitting $2.3 trillion, according to estimates by InterSec Research Corp.
Those increases will be fueled by hefty overseas allocations by pension funds in the United States, Japan and the Netherlands.
On a percentage basis, nondomestic investments are projected to increase to 17% of assets on a global basis by the end of 2002, up from 13% at the end of last year. Five years ago, pension funds had only 8% of assets invested abroad.
But pension fund growth overall is slackening, said Chris Nowakowski, InterSec's president. A key trend is "slower pension growth worldwide, driven by defined benefit plans (whose) liabilities aren't growing or (whose) liabilities are being controlled."
Funding ratios are improving, trimming contribution levels, Mr. Nowakowski said.
InterSec officials project total global pension assets will rise 41% to $13.7 trillion within the next five years, up from $9.7 trillion at the end 1997. In contrast, global pension assets grew 62% during the previous five-year period.
DC BOOM
On the other hand, defined contribution plans are booming. Their expected growth rate for the next five years ranges from 15% to 50%. On average, the rate is double that projected for defined benefit plans, he said.
But defined contribution plans outside North America are designed differently, lacking a wide choice of participant investment options.
Instead, there typically are anywhere from one to three lifestyle-type funds.
"Beneficiaries are not being offered the Howard Johnson menu of ice creams," Mr. Nowakowski said.
In Switzerland, where 40% of retirement assets are in defined contribution plans, there are no investment options, he said. Regulatory issues prevent virtually all Swiss companies from offering investment choices to participants.
What's more, plans generally are unbundled. That means managers "no longer have to be a Fidelity" with a host of administrative services to win market share, he said.
"All fund managers can go after Nestle or Novartis," he added.
Meanwhile, a number of countries are shifting toward specialist managers and away from a global balanced approach. Examples include the United Kingdom, Canada, Japan, Switzerland and South Africa.
In contrast, U.S. pension funds are adopting global multiasset mandates. In the past three years, $6 billion in assets have been directed into multiasset portfolios -- compared with a total of $5 billion for combined global and international mandates, he said.
U.S. SHARE TO DROP
U.S. pension funds will have a shrinking share of global pension assets, although they will still account for the majority of assets.
U.S. pension assets now compose 56.1% of the total, at $5.4 trillion. InterSec officials project that will slip to 52.5% by year-end 2002, as U.S. pension assets grow to $7.2 trillion.
Overseas investment by U.S. funds, however, is projected to increase, rising to 14% of total assets within five years from 10% now. In dollar terms, that represents an 86% jump to $1.04 trillion by the end of 2002, up from $556 billion last year.
Japanese pension funds also are projected to increase overseas exposure, to 21% of assets within five years from 17% now. That represents an additional $147 billion coming into non-Japanese markets, as nondomestic investments hit $340 billion.
In the Netherlands, international investments are expected to reach 28% of assets, up from 24% last year and only 12% five years ago. Dutch funds will have total assets of $445 billion within five years, according to InterSec.
EUROPEAN FORMATION
Pension funds also are developing in continental Europe, as countries realize they no longer can afford generous state pay-as-you-go pension systems.
Germany has just approved a new type of savings plan for individuals, called Altersvorsoge-Sondervomogens that will require a minimum investment of 50% in equities.
New pension funds are being formed in Italy; InterSec projects that market will grow to $120 billion by the end of 2002, up from $68 billion last year, although only a negligible portion will be invested abroad.
And France is promising to push through legislation by the year's end, Mr. Nowakowski said, although the country has a history of stalling on private pension reform.
Pension assets also are growing rapidly in Third World countries. InterSec officials forecast pension assets in Latin American countries will more than double within five years, to $290 billion from $142 billion. That growth largely is driven by Brazil, which accounts for 62% of the total.
And in Africa, the Middle East and Asia, assets are projected to hit $320 billion by the end of 2002, up from $167 billion. South Africa accounts for 72% of that total.
