LONDON -- The pension markets of Japan, Switzerland and Canada will provide rich pickings over the next few years for money managers specializing in international equities, according to new research from Watson Wyatt Worldwide.
Equity exposure in the three countries is likely to increase significantly over the next three years but will be reduced in the U.K. pension market, according to the consultant's annual survey "The World's Major Savings Markets."
By the end of December 1998, Japanese pension plans had an average foreign equity weighting of 19% of total plan assets, which is expected to increase to 25% of total assets by the end of 2003.
Swiss pension funds are likely to hold 13% of their assets in foreign equities by 2003, compared with only 8% in 1998; while Canadian funds will increase their foreign equity holdings to 23%, compared with 16% in 1998.
U.S. funds are expected to increase their foreign equity holdings only marginally by the end of 2003 to 12% of total fund assets, compared with 11% at the end of 1998.
Pension funds in France are expected to retain their domestic equities holdings until at least 2003 due to their preference for assets listed on their domestic exchange, said Philip Robinson, senior investment consultant at Watson Wyatt Partners, Reigate, England.
The report also showed a greater than expected increase worldwide in the use of passive managers.
"The move to passive management has confounded even the most optimistic of forecasts in the early 1990s," Mr. Robinson said. "The use of passive managers has suddenly increased in Ireland beyond expectations."
By 1998 the proportion of total assets managed passively had exceeded 5% in eight major developed markets, compared with only three markets in 1993.
The use of passive managers is likely to increase over the next three years in Switzerland, the Netherlands, Canada and Australia, the study predicts. The increased use of core/satellite asset allocation strategies and decrease in balanced strategies will trigger greater demand for passive managers in Switzerland. But the overall move to core/satellite strategies by the pension plans surveyed has been slower than expected, in part because of cost-cutting efforts by small and medium-sized pension plans.
Growth in pension fund assets is likely to be most buoyant over the next three years in Australia and Hong Kong, according to figures calculated using Watson Wyatt's assumptions regarding cash flow, future inflation and real rates of return.
The report estimates pension assets in Australia will increase by 39% to $285 billion by December 2003 from $205 billion in December 1998. Pension assets in Hong Kong are likely to grow by 47.6% over the same period to $31 billion from $21 billion.
Based on current asset allocations, however, the report forecasts more muted investment returns in France, Germany and Switzerland. By 2003, pension assets likely will increase by 21.4% in France to $98 billion, 25% in Germany to $215 billion and 20% in Switzerland to $421 billion.
The report estimates that cash flows into defined contribution schemes are likely to overtake flows into defined benefit schemes by 2003, partly due to the increased use of DC plans for younger work forces. But it is also the result of many defined benefit plans being relatively mature, allowing plan sponsors to take contribution holidays, as has often been the case in the United States, United Kingdom and Netherlands.
Inflows into defined contribution plans will be particularly strong in Australia and Switzerland, where pension contributions are compulsory and there is likely to be a trend of switching DB schemes to DC arrangements, the report predicts. But the fairly recent shift to DC means the assets of these funds will remain relatively small.
Merger and acquisition activity means foreign managers have much greater influence than they did five years ago, said Mr. Robinson.
In Japan, where foreign managers control nearly a third of all pension-related savings, it is considered a marketing advantage in both the retail and institutional markets to have a foreign brand name.