REIGATE, England -- The U.S. pension market is still king of the hill. But other markets are growing more quickly.
U.S. pension assets totaled $6.124 trillion at year-end 1997, the most recent date at which international comparisons could be made, according to a new survey by consultant Watson Wyatt Worldwide, Reigate.
That total vastly surpassed second-ranking Japan, at $1.9 trillion; and the United Kingdom, at $1.05 trillion. Canada ranked a distant fourth at $517 billion.
But smaller markets are starting to catch up. Australia, Switzerland, Germany and the Netherlands were the fastest growing markets between Dec. 31, 1993, and Dec. 31, 1997, with some surpassing 50% growth during the four-year period. Even Britain rose more than 40% because of its heavy weighting in equities. In contrast, the U.S. pension market grew about 28%, slightly below the 30% average for the 11 countries included in the study.
European countries still rely more on insurance vehicles for savings. While Europe accounted for 19% of total pension assets in major markets, it held 36% of total major market insurance assets.
In total, though, the United States, Japan and the United Kingdom accounted for more than 80% of the $17.4 trillion in institutional assets based in developed markets, making it critical for money managers with global aspirations to focus on those markets, the study said.
The importance of mutual fund assets as a source of retirement and other savings is growing. The U.S. mutual fund market has more than doubled in value since 1993 to $4.5 trillion at year-end 1997, accounting for more than 70% of global mutual funds assets.
And some countries that don't rely on employer-provided pensions are seeing mutual funds grow by leaps and bounds, said Philip Robinson, head of research for Watson Wyatt's global asset study.
Bundle for Italy
At year-end 1998, Italy had $4.42 trillion in mutual-fund assets, racing past France which had $4.08 trillion, he said. Next were Spain, at $2.33 trillion; and Germany, $2.31 trillion.
Differences in pension fund asset allocations remain wide. The most striking increases in total equity allocations occurred in the United States, rising to 61% in 1997 from 39% in 1993; and Canada, up to 55% in 1997 from 46% four years earlier.
Equity allocations in Australia and Ireland declined marginally; strong domestic bond markets may be responsible in Australia.
European pension markets still retain relatively low equity allocations, although Dutch pension funds boosted equity allocations to 36% from 25% in the four-year period. Switzerland, at 18%; France, at 16%; and Germany, at 11%, remain low.
Cross-border investments, however, are increasing on the whole. The biggest changes occurred in the Netherlands, growing to 21% of total pension assets from 16%; Japan, up to 20% from 8%; and the United States, to 11% from 5%.
The extent of external management of pension assets also varies by country. In Hong Kong, Great Britain, the United States and Ireland, at least 85% is run by external managers. France's small pension markets are 100% outsourced because of regulatory requirements. But Japan is coming up fast, given rapid changes in regulation and the country's weak securities markets.
Still, the vast size of the U.S. pension market makes it the hottest target: $5.327 trillion in assets were managed externally at the end of 1997. The closest rivals were Japan, at $951 billion; and the United Kingdom, $924 billion.
Penetration by foreign managers in the U.S. market was small: only 3% of U.S. pension assets -- or $160 billion -- were managed by foreign managers. The percentage is the same in Britain.
In Hong Kong, however, four-fifths of pension assets are run by foreign-based managers. Australia runs a distant second, at 30%.
By the end of 2002, Watson Wyatt analysts expect increased equity allocations in key pension markets, including Hong Kong, Canada, Ireland, Australia and most major European pension markets.
Only the U.K. pension market is expected to see equity allocation decline, to 68% from 72%, because of its maturation. The U.S. pension market is expected to see an increase to 62% from 61%.
Passive management also is expected to become increasingly important. In the United States, Watson Wyatt consultants project it will climb to 35% of equity assets from 26%, while growing to 30% of pension assets from 20% in Britain.
Similarly, passive management is expected to grow as a proportion of equities in most other major markets, particularly in Switzerland, the Netherlands, Australia and Japan.
Meanwhile, foreign equity exposure is expected to continue rising, notably in Japan, projected to reach 25% by the end of 2002 from 20% at the end of 1997, and Switzerland rising to 12% from 8%. (Other continental European international equity allocation increases are masked because the domestic asset base has shifted to the eurozone from a single country.)