The world's largest retirement funds recorded double-digit growth in 2017, with the latest survey by Pensions & Investments and the Thinking Ahead Institute showing assets of the 300 largest retirement funds growing 15.1% to hit $18.1 trillion.
By comparison, assets grew 6.1% in 2016.
And as global equity markets produced a 23.97% gain, according to the MSCI All Country World index, the top 20 retirement funds recorded equally impressive growth, with assets increasing 17.4% for the year ended Dec. 31, to $15.7 trillion. That compared with 7.1% growth for the top 20 funds in 2016.
The World 300 now account for about 43.8% of total retirement assets in the Thinking Ahead Institute's Global Pension Assets Study 2018, up slightly from 43% at year-end 2016.
Willis Towers Watson Investments' Thinking Ahead Group is the executive team to the firm's Thinking Ahead Institute — a global, non-profit group that seeks collaboration and change in the investment industry for the benefit of savers.
"When you think of capital markets forging ahead, we've had good five-year figures, the (global financial crisis) is dropping out," said Roger Urwin, global head of investment content in London at Willis Towers Watson PLC and part of the research team for the institute. "We've found (the 300 funds are) keeping pace with that growth, not growing faster than capital markets. That's because, while we did get a fair amount of contributions, they had to pay out a lot. That's a factor increasingly keeping their growth in single digits. But a few funds have double-digit growth — in particular one or two of the emerging market funds."
For the first time, an India-based retirement fund has made its way into the top 20 largest funds, with the Employees' Provident Fund Organization, New Delhi, placing at number 19 in the ranking, with $134.3 billion in assets. In dollar terms the fund's assets grew 22% for the year, propelling it from 21st place in the year-earlier ranking.
Four other emerging markets-based funds retained their places in the top 20:
South Korea's National Pension Service, Seoul moved into third place, up from fourth a year ago, with 26.1% growth in dollar terms to $582.9 billion.
National Council for Social Security Fund, Beijing, saw assets grow 31% in dollar terms to $456.9 billion. It stayed in sixth place in the ranking.
Malaysia's Employees Provident Fund, Kuala Lumpur, moved up one place to 14th, as assets grew 21% to $200.3 billion.
The Government Employees Pension Fund, Pretoria, South Africa saw asset growth of 12.4% in dollar terms to $133.9 billion. It dropped one place in the ranking to 20th.
The P&I/Thinking Ahead Institute World 300
Ranked by total assets, in U.S. millions. U.S. fund data are from the P&I 1,000, published Feb. 5, 2018; non-U.S. fund data are as of Dec. 31, 2017, unless otherwise noted. For a printable version of this chart, click here.
Defined benefit and defined contribution breakouts were not available for or applicable to all non-U.S. funds.
Notes: 1 As of March 31, 2018; 2 As of March 31, 2017; 3 As of Jan. 31, 2018; 4 Global figure (ex-U.S.); 5 Global figure; 6 As of Jan. 1, 2018; 7 As of Dec. 29, 2017; 8 As of May 31, 2018; 9 Estimate; 10 As of Feb. 28, 2018; 11 As of Sept. 30, 2017; 12 As of June 30, 2017; 13 As of April 30, 2018; 14 As of Feb. 24, 2018
Mr. Urwin also noted that these five emerging market-based retirement funds also were the five new entrants into the top 20 in the past 10 years. He said the establishment of a more significant and resilient pensions industry in Asia and Africa has been a strong trend of late.
The data collated in the survey show that "the growth of pension capitalism is both a developed market and an emerging market phenomenon — that is quite interesting," Mr. Urwin said.
The 14.7% growth in dollar terms to $129.7 billion was not enough to keep Denmark's ATP in the top 20; the Hilleroed-based pension fund fell to 21st place, from 20th in the previous survey.
By region, North America retained its crown as taking the lion's share of total assets, at 42.3% of all assets — down from 44.1% — and $7.66 trillion. The region's annualized growth for the five years through year-end 2017 was 6.2% to year-end 2017.
Asia-Pacific funds took a 27.3% share of total assets up from 26.1% last year. The region's funds had $4.95 trillion in assets, and an annualized five-year growth of 6.1%. The region overtook Europe this year in terms of regional representation in the World 300. Europe's assets totaled $4.8 trillion, with annualized five-year growth of 3.8% and accounting for 26.5% of the total. That compared with a 26.1% share at year-end 2016.
"Pensions in Asia is quite a mixed picture, but in particular the sovereign funds have been growing a fair amount. There isn't the same infrastructure private sector companies being very involved in pensions in Asia. The U.S. has kind of kept its dominant pensions place in the world interestingly, and Europe has gone back," said Mr. Urwin. He noted European pension funds are more associated with "defensive investment positions and maturing liabilities as they have been around for longer — the U.K. and Dutch markets have this characteristic. They pay out a lot, have a little bit less in risk assets, and risk assets have done better over this period of time," he said.
Asset allocation of the top 20 funds has changed over the year. On a simple average portfolio calculation, equities remained the highest exposure for these funds at 42.1%, up from 41.7% in the 2017 study. Bond exposure was 36.9% down from 37.2%, and the remaining 21% was invested in alternatives and cash, compared with 21.1% last year.
On a weighted average basis, the equities allocation of the top 20 funds was 46.3%, up from 44.2% in the 2017 survey; bonds was down to 36.1% exposure from 37.6% last year; and alternatives and cash took the remaining 17.6% of allocations, down from 18.2%.
"Equities produced good returns in 2017. And pensions are a bit overweight equities and alternatives relative to other institutional types (of investors) — they're more long term," although there is a segment of plans closer to maturity that have a higher bonds content, Mr. Urwin said.
Funds would have benefited from these levels of equity allocation, with the Russell 3000 index gaining 21.13% in 2017; the MSCI Europe index gaining 25.51%; the MSCI Emerging Markets index returning 37.28%; and the FTSE All-Share index gaining 13.1% in 2017, despite the threat of a U.K. exit from the European Union hanging over the country.
Currency is a factor
The growth of the World 300 and the top 20 is bigger than in previous years, and Bob Collie, head of research for the Thinking Ahead Group in London, said this also in part reflects the impact of currency. All data in the survey are converted into U.S. dollars, and the currency appreciated 14.15% vs. the euro; 9.51% vs. the pound sterling; and 8.34% vs. the Australian dollar.
However, the dollar depreciated 5.97% against the Indian rupee; fell 3.65% against the Japanese yen; and dropped 6.47% vs. the Canadian dollar.
Mr. Collie also highlighted another ongoing trend in the study: a continued fall in the proportion of defined benefit assets. The 2018 survey found 64.7% of total assets were invested through DB funds, down from 65.5% last year. However, DB assets increased by 13.5%, compared with 5.6% growth in 2016.
Defined contribution assets accounted for 22.7% of the total, up from 22.2% last year, and assets surged 17.6% in 2017. In 2016, DC assets grew 9.6%. Assets in reserve funds — which are set aside by national governments to guarantee pension payments in the future — accounted for 11.8% of total assets in 2017, up from 11.5% in 2017; and also grew 17.6%. In 2016 these assets grew 3.9%.
And hybrid funds, which are plans that incorporate components of both DB and DC, accounted for 0.8% of total assets — steady over the year — and increased 15.1% in terms of asset growth for the year. In 2016 these assets grew 2.9%.
The DB/DC split is a "dynamic that has been in place for some time and is well understood and analyzed," Mr. Collie said. "Everyone is aware of the direction things are going. The surprise, in a sense, is that even though the direction is clear, when it comes to these really big funds they are still predominantly DB funds," he said. "Even though they may not be the long-term future, these are at least the present."