Total assets held within the largest defined benefit funds across the globe grew at a faster rate in 2014 than 2013, according to the annual survey conducted by Pensions & Investments and Towers Watson & Co.
The reasons for that growth go beyond funds accumulating assets. Rather, the effects of quantitative easing and plan sponsors' eagerness to clear fund deficits by contributing cash have played a big part as well, industry experts said.
DB assets grew by 3.7% in 2014, compared with 2.6% in 2013, to total $9.79 trillion. Total assets of the 300 largest retirement plans in the world were $15.36 trillion, up 3.4% from 2013. Those 300 plans represented 42.6% of total global retirement assets, as measured by Towers Watson's Global Pensions Asset Study — a slight decrease compared with 2013, when the largest 300 retirement funds accounted for 43.7% of total global assets.
“One of the great problems facing DB plans is the low discount rate — that has pushed them into equities and risk assets in general,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England. “The compensation comes in the form of taking a lot more risk.”
He added that being in equity markets over the past few years has been “very rewarding, and I think that is what we see when we see growth in DB assets.”
With stubbornly low discount rates and interest rates, “private plan sponsors are trying to shore up the assets of the DB plan,” leading to some “having to dig into the coffers to make one-off, significant contributions to bring plans back into solvency,” Mr. Clark said.
But whatever the reason, it is still a positive sign.
“This is still accumulation, and the fact assets have doubled in the last 10 years says something about the health of the savings industry and savers,” said Chris Ford, Surrey, England-based global head of investment at Towers Watson. “Generally speaking, I would say it is a good thing. The challenge, however, is that the numbers are artificial, with policymakers still supporting the capital markets.”
Mr. Ford warned that things might look rosy, as assets are up, “but to a certain extent we have borrowed that money from our kids, because that is what quantitative easing does.”
Data for the P&I/Towers Watson World 300 are largely as of Dec. 31, and since then the U.K. and U.S. have pressed pause on financial loosening. “We are now starting to see that roll off slightly. The withdrawal of QE means that markets are beginning to function more normally, and so we have seen the return of volatility,” Mr. Ford said.
Last year saw a continuation of the positive effects of quantitative easing on risk assets, albeit to a lesser degree than in 2013. The Russell 3000 index returned 12.53% in 2014, vs. 33.5% in 2013; and the MSCI All-Country World index gained 4.76% in 2014 in U.S. dollar terms, vs. 23.5% in 2013.
Removing the U.S. from the equation results in a drastic change: the MSCI All-Country World index ex-U.S. was down 3.31% in 2014, vs. a 15.97% gain in 2013, in U.S. dollar terms.