Assets of the world's top 300 retirement plans increase 9.8%

Assets of the world's largest 300 retirement funds increased by 9.8% in 2012, eclipsing the 1.9% growth rate from the previous year, according to an annual survey conducted by Pensions & Investments and Towers Watson & Co.

The latest growth marked the fourth consecutive positive year for the top 300 funds as they continued on an upward trajectory from the depths of the global financial crisis. Aggregate assets totaled $14 trillion, or about 47% of the total global pension assets estimated by Towers Watson.

“It was a year in which taking risk paid off,” said Carl Hess, global head of investments at Towers Watson, New York. “Global (developed markets) equities were up about 16%, and bonds also performed well, if not necessarily spectacularly. Returns in 2012 were very nice no matter where you were. What's not to love?”

Although investors faced a series of economic threats during the year, they didn't materialize. For example, equity markets continued to climb despite fears surrounding a possible collapse of the euro and the impact of the fiscal cliff in the U.S. Out of 12 funds in the top 20 that published annual reports online, eight had stressed volatility and uncertainty in global markets. Low interest-rate levels were also often cited as a major source of concern.

“As we are entering (the second half of) 2013, those problems have not really gone away,” Mr. Hess added. “It does leave us a little more precariously positioned.”

Equity was the best-performing asset class in 2012. The Russell 3000 index returned 16.4%. The MSCI All World ex-U.S. index grew by 16.5% and the MSCI Emerging Markets index added 18.2% for the year.

In fixed income, the Barclays Capital Global Aggregate Bond index increased by 4.3% during the same period.

“2012 was pretty good for growth, and it was mostly down to equity, which was the single biggest risk taken by pension funds,” Mr. Hess said.

So far this year, U.S. equities have continued to strengthen, with the Russell 3000 returning 20.3% during the first seven months ended July 31. However, emerging markets have weakened substantially, threatening to thwart the global recovery. The MSCI Emerging Markets index dropped 8.6% during the same time.

For the first time, the survey split the funds according to defined benefit, defined contribution, reserve funds and hybrid plans. DB plans, which accounted for 68.5% of the total worldwide assets, grew at a rate of 7.6% compared to the 12.4% pace for DC in the year ended Dec. 31, 2012. Overall, the share of DC assets was estimated at about 20.2% of the total, while reserve funds accounted for 10.6%. The remainder of the assets was in hybrid funds.

“It's hard to find an economy where there are new DB plans being created,” Mr. Hess said. “If we look at Asia, for instance, with the exception of Japan, most have avoided DB. ... It will be awhile before DC reaches the maturity level of DB, but the pendulum has definitely tilted in that direction.”

Latin America has one of the highest DC growth rates, particularly in Mexico, where retirement assets grew by about 11.1% in local currency terms and about 7.4% in U.S. dollar terms on an annualized basis in the past five years. Spurring the rise in DC assets was a wave of recent social security reforms throughout the continent, many of which are loosely based on the Chilean model in introducing personal retirement accounts, Mr. Hess said.

“Like Australia, these reforms have resulted in large new (DC) asset inflow,” Mr. Hess added, referring to the 12.8% annualized growth in DC for Australia over the past five years in U.S.-dollar terms. “These (DC) funds will likely grow rather large rather quickly.”

The U.S. share of the worldwide assets also grew slightly in 2012 to 35% in 2012 compared to 34% last year, partly due to double-digit returns in equities combined with the strengthening dollar vs. the euro and yen. In addition, new asset inflows bolstered many public funds that were “shoring up their finances in 2012,” Mr. Hess said.

“In the long term, however, we're not likely to see new U.S. corporate funds, and therefore, the long-term trend is still pointing downward in terms of U.S. significance rather than upward,” Mr. Hess said.

In the past five years, aggregate assets held by North American funds in the top 300 decreased by an annualized 0.5% while the total worldwide assets rose by an annualized 5.6%. Assets held by Asia-Pacific and European funds grew by an annualized 6.7% and 5.5%, respectively. Funds from the “other” category — including many emerging markets such as China, Chile and Mexico — grew at the fastest annualized rate of 10.9% during the same period.

“The direction of the U.S. pension system is comparatively more mature, with fewer and fewer funds at the top” compared to other regions, according to Mr. Hess.

Currency effects bolstered the asset growth rate in nations such as Australia and China, where the local currency appreciated by an annualized 3.4% and 3.2%, respectively, against the U.S. dollar over the five years ended Dec. 31, 2012. Against the euro and the British pound, however, the dollar rose 2% and 3.9%, respectively, during the same time. As a result, pension funds in those regions tended to report more subdued growth in dollar terms.

The top three funds remained the same in 2012. The $1.29 trillion Government Pension Investment Fund, Tokyo, continued to top the list at nearly twice the size of the runner up — Norway's $712.6 billion Government Pension Fund Global, Oslo. In third was the $372.9 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands.

Sovereign pension funds such as Japan's and Norway's represent 28.4% of the worldwide assets, with 26 funds controlling about $4 trillion, according to the survey.

Among the top 20 funds, there were some changes to the order though not the names of the funds themselves. Most notable is China's $177.5 billion National Social Security Fund, Beijing, which climbed three spots to enter the top 10 for the first time, replacing Malaysia's $175.7 billion Employees Provident Fund, Kuala Lumpur, which dropped to 12th. In the past five years, the NSSF has grown at an annualized rate of 20.2% in U.S. dollar terms, according to the survey.

“The NSSF entered the top 10 with an arrow pointing up,” Mr. Hess said. “I suspect we'll see more Chinese funds in the top 300 going forward” due to both asset growth and new inflows. Furthermore, growth rates of countries such as Korea, Singapore and Malay-sia were also high, consolidating their positions in the top 20.

Aggregate assets of the top 20 grew by 8.6%, lagging the overall increase of top 300 funds. However, the top 20 funds still accounted for 39% — or $5.5 trillion — of the total worldwide assets of the top 300 funds. Historically, the top 20 grew at a faster pace than the overall top 300, averaging an annualized 4.8% compared to 3.2% over the past five years, respectively. The U.S. share in the top 20 has dropped to 20.8% in 2012 from 36% five years ago.

On an arithmetic average basis, the top 20 funds invested about 40% in fixed income and another 40% in equities in 2012. The remainder was allocated to alternatives and cash.

In addition to traditional equities and bonds, returns from alternative assets also boosted assets at the top 300 funds. The HFRI Fund Weighted Composite index grew by 6.16% in 2012, and the Cambridge Associates LLC U.S. Private Equity index increased by 13.8%. Healthy returns were also recorded for real estate, with the NCREIF Property index rising by 10.5%.

“With assets having climbed higher in 2012, now there's further for them to fall,” Mr. Hess said.

For global market performances to continue through 2013, they must be supported by sustained economic growth.

“In China, recent data suggests growth is slowing. In the U.S., how much of the recent rally is due to real growth and how much of that is fueled by cheap money? In Europe, the immediate problems of the euro still have yet to be resolved,” Mr. Hess said. “It's difficult at the moment to see where strong growth is going to come from.”

Data Editor Timothy Pollard contributed to this story.