Assets of top plans drop; growth slows

The good times have well and truly stopped rolling for the world's largest retirement funds, despite all-time highs across global stock markets, analysis of data from the annual survey conducted by Pensions & Investments and Willis Towers Watson PLC shows.

Annualized growth for the five years ended in 2015 was 3.5% for the largest 300 retirement funds and 3.6% for the 20 largest funds, the data show. Over the five years to year-end 2009, the annualized growth rate was 6.1% for the 300 largest funds and 6.5% for the top 20.

“The highest-level view is that times have never been tougher for these funds — they are all very concerned about their respective futures,” said Roger Urwin, Reigate, England-based global head of investment content at Willis Towers Watson. “For a long time — particularly 1985 to 2005 — those funds led a charmed life, but it is right to say things have never been tougher for them. The stability of the (defined benefit) system has been brought into doubt.”

The top 300 funds lost 3.4% of their value in 2015, with total assets dropping to $14.8 trillion. In 2014, growth was 3.4%. These funds represent 42% of total global retirement assets, as measured by Willis Towers Watson's Global Pensions Asset Study, down from 43.1% in 2014.

The volatility in growth of these assets is not a surprise, given current levels of economic and political uncertainty, added Mr. Urwin. “The context of market changes since the global financial crisis is one in which record-low interest rates have supported a lot of liquidity in the system: equity markets have done well, bond markets have done even better given continuing low interest rates. All of that has created fairly decent performance up until 2014.”

Mr. Urwin reinforced the need to consider weak annualized growth over five years, rather than focusing on 2015's poor year. He said 2015 was “well within recent volatility ranges. ... Of more concern is that the five-year trend is quite weak. These funds need 5% to 8% growth to be comfortable and to make progress — and 3.5% annualized over five years is a weak return. There is definitely a decline on average across the group in their solvency and creditworthy statuses.”

This year's survey found the top 300 retirement funds remain largely defined benefit by value of assets. DB assets accounted for about 65.9% of the total in the ranking, decreasing from 66.8% in 2014 — a continuation of a trend, said sources. Defined contribution plan assets remained fairly flat, accounting for about 21.5% of total assets in 2015 vs. 21.2% in 2014. Reserve funds took about an 11.7% slice of assets vs. 11.3% a year previous, and hybrid plans — which incorporate both DB and DC components — accounted for the remainder, again fairly flat against 2014's share. Disclosure by type of fund was available for 276 of the 300 funds, accounting for 95% of assets in the survey.

“It is still a DB story, but that is a legacy story,” said Gordon Clark, professor and director of the Smith School of Enterprise and the Environment at the University of Oxford, Oxford, England. “And particularly in the U.K. it is a legacy story ... where we go next is not good.” Figures from JLT Employee Benefits show the total deficit of all corporate DB plans in the U.K. rose 14.4% in July, to hit a record £390 billion ($515.7 billion), and jumped 52.9% for the year ended July 31. The funded level of these plans fell to 78%, down from 80% at the end of June and down from 83% a year previous.

In terms of annualized growth, North America-based retirement plans (which for this survey exclude Mexico) fared better than their U.K. brethren and counterparts elsewhere in the world. North American funds in the top 300 accounted for $6.5 trillion of total assets, with annualized growth in the past five years of 5.6%. Europe-based funds grew 3.6% over that period to total $4.1 trillion, while Asia-Pacific funds grew 1.3% and have $3.7 trillion of total assets. Funds in other domiciles — including Latin America and Africa — shrank by about 3.9% in the five years.

And while North American funds were not immune to 2015's difficulties, with a decline in assets from the roughly $6.7 trillion in 2014, their continued and growing dominance is interesting, said Mr. Clark. It is particularly interesting given that 76.6% of North America-domiciled assets of the 300 largest funds are in defined benefit funds.

Mr. Clark outlined two explanations — either the U.S. and Canadian plans are adding members and assets, which he said seemed unlikely, or “funds in North America are benefiting from economic growth in Canada and the U.S.”

The MSCI All-Country World index returned -4.26% in 2015, compared with a 4.76% gain in 2014. The Russell 3000, however, had a 1.47% loss in 2015, compared with a 12.53% return in 2014. But taking the U.S. out of the equation makes a huge difference: the MSCI ACWI ex-U.S. returned -7.98% in 2015, compared with -3.31% in 2014.

And because the discount rate used to value liabilities has “not collapsed, and actually shows prospects of increasing, if anything” in the U.S. vs. other parts of the world, it's actually helping North American funds, Mr. Clark said. “The economic circumstances in North America are favoring the incumbent funds ... vs. Europe where in some countries we have negative interest rates,” he said, adding that low interest rates are “taking their toll” on European and U.K. pension funds. And Mr. Clark expects the diverging performance to continue: “I perceive looking forward that with an increase in the Federal Reserve over-the-counter rate, plus continuing success in stock markets, that we continue to see North America outstrip Europe and Asia-Pacific.”

More generally, Mr. Urwin expects to see more woe for defined benefit funds. “We are actually now reaching a point where even though stock levels are at record levels, the underlying growth rates have been relatively disappointing, and this has created pressure on the solvency of these funds.”

For 2016, another year of declining interest rates and an “extension to the astonishing strength of bond returns ... is bad news for ... funds that have discount rates tied up with bond yields, which is the majority,” said Mr. Urwin. The Barclays Capital Aggregate Bond index returned 0.55% in 2015, and is up 5.89% for 2016 through Aug. 29.

Continued DB dominance is also a concern. “The aging population and increased life expectancy are demographic features adding to the headwinds for pension funds at the moment,” Mr. Urwin said. “The majority of the pension fund assets are DB in nature, and are designed to work by reference to past investment conditions. If there is a fundamental difference between the past and the future, the sustainability of the system will be at risk. That is something that is continuing to cloud the horizon for most of these funds.”