Top funds see biggest drop since 2008

A rocky market environment that affected all major asset classes saw total assets of the world's top 300 retirement plans record their worst drop since the global financial crisis of 2008, according to the latest annual survey by Pensions & Investments and Willis Towers Watson PLC's Thinking Ahead Institute.

Assets of the top 300 retirement plans — including public and corporate pension funds, defined contribution plans and state-owned pension funds — fell 12.9% in 2022 to $20.6 trillion, compared with 8.9% growth in 2021.

The top 20 funds fared slightly better, with their collective assets falling 11.8%. Their compound annual growth rate over the last five years was also higher at 2.8%, compared with that of the overall top 300 funds at 2.6%. In 2021, the CAGR of the top 20 funds over five years was 8.8%, and that of the top 300 funds was 8.5%.

"Anyone who was actually in the industry wouldn't be too surprised with this, given how the capital market performed in 2022. … Just looking across not only equity but also bond value, there has been a significant drop in many markets, so that contributed to a majority of the ... decrease over the year," said Jessica Gao, London-based director at the Thinking Ahead Institute.

In 2022, the MSCI World index fell by 17.73% and the FTSE World Government Bond Index fell 18.26% in USD unhedged terms.

"This is actually one of the biggest falls (in assets) we have observed since the global financial crisis, so it's quite significant," she added.

In 2008, the top asset owners saw their assets fall in value by 12.6%, but Ms. Gao said that comparing the markets in 2022 with 2008 presents complexities, as they are not a like-for-like comparison.

"What the 2022 data reveals is a sizable decline in assets, with a similar downturn only observed in 2008 over the 20-year history of the Top 300 pension funds study. This doesn't necessarily imply that all pension funds are in a worse position. In fact, certain (defined benefit) funds are better positioned due to higher interest rates, resulting in higher discount rates for pension liabilities," she said.

The drop in 2022 was also different from 2008 in that 2022 had its ups and downs, whereas 2008 was a cliff drop from 2007, she added.

During the GFC in 2008, the MSCI World index fell 40.7% from the previous year, while the FTSE World Government Bond index rose 10.9%.

Even though markets have started to show signs of recovery — the MSCI World index is up 19.34% year-to-date as of July 31, for instance — asset owners are not out of the woods yet, as inflation and interest rates remain elevated and geopolitical risks continue, Ms. Gao said.

"As a whole, the investment industry is facing greater volatility that arose from economic conditions. We all know we have high interest rates and high inflation in Europe and the U.S. Then you have the emerging markets on the brink of deflation and various other economic conditions. At the same time, we are observing an increase in geopolitical risks and the tension between China and the U.S. In general, we think this wide systematic risk is on the rise," Ms. Gao said.

She also observed that the macro environment is changing faster than pension funds are evolving, which has prompted some pension funds to look more carefully at macro risks and enhance their governance policies, business models and internal processes to be able to adapt more quickly.

Pension funds such as AustralianSuper, Melbourne, noted the speed of change in markets in 2022, for instance.

"In November 2021, investment markets were trending higher, buoyed by the economic recovery following the COVID-19 downturn. Just months later, amidst an environment of persistently high inflation, rising interest rates and a weakening outlook for the global economy, equity and bond markets gave back their gains — demonstrating just how quickly markets can change," an unnamed representative for the $176.4 billion super fund said in the report.

Asset owners also note new technological advancements such as the development of artificial intelligence, the research found. For instance, AI can enhance data processing across multiple platforms to cut through the noise and consolidate sets of data that users are looking for more easily, Ms. Gao explained.

"We're still at the early stage and looking at how (AI) can influence and how the investment industry can be affected or benefit from the technology," she added.

Asset owners that have small teams may rely on their asset managers to adopt AI in their investment processes, while larger asset owners are putting in more effort to understand the technology and adapting it themselves, she said.

She also noted that environmental, social and governance factors continue to be a growing part of pension funds' investment processes, but regulations and politicization have become a growing trend.

"On regulation, you're seeing Europe being very forward with sustainability and wider climate issues ... but on the other side, if we cross the ocean, we're facing some headwinds with what pension funds can do at the moment because of the policies in the U.S., which are very restricted," she said.

In response to how asset owners can mitigate these headwinds, she said that finding the right balance between their resources, time and efforts within their limitations, is important to make sure they are moving in the right direction.

By region, North America had the highest annualized growth over the past five years at 4.2%, followed by Latin America and Africa at 2.4%, Asia-Pacific at 1.9%, and Europe at 0.7%. North America also kept its share of total assets steady at 45.6%.

However, Europe's share of assets fell to its lowest value of 24.1% from 25.9% in 2021, while Asia-Pacific's rose to 26.4% from 25.5%. Latin America and Africa made up 3.8% of all assets, up from 3.1% the year before.

Funds in all regions were primarily invested in equities, although to varying degrees. North American funds had on average 50.4% of their portfolio in equities, 19.4% in bonds and 30.2% in alternatives and cash. European funds had 47.4% in equity, 37.6% in bonds and 15% in alternatives and cash.

Asia-Pacific funds had a more even mix between the major asset classes, with 47.3% in equities and 40.7% in bonds, and the remaining 12% in alternatives and cash.

The U.S. held the biggest share of assets among the top 300, with 146 organizations that made up 39.3% of the total value of assets. Since 2017, the U.S. has had the highest number of movers, with 26 pension funds that joined the list and 13 that dropped off.

Japan took second place, with 11 funds making up 10.3% of the total value even after a net loss of six funds leaving the ranking since 2017.

The U.K. also had a net loss of six funds in the list, tying with Japan.

Canadian funds made up 6.4% of the ranking with 17 funds after a net loss of one fund during the five-year period.

The top five funds in terms of size remained unchanged, with Japan's Government Pension Investment Fund, Tokyo, retaining its top position with $1.45 trillion in assets, down 16.2% for the year in dollar terms; followed by Norway's Government Pension Fund, Oslo, with $1.3 trillion, down 9.7%; and South Korea's National Pension Fund, Jeonju, with $706.5 billion, down 11.5%.

The Federal Retirement Thrift Fund Board, Washington, remained in fourth position with $689.9 billion, and the Netherlands' Stichting Pensioenfonds ABP, Heerlen, kept in fifth place with $490.4 billion. The California Public Employees' Retirement System, Sacramento, also retained its ranking in sixth place with $432.2 billion.

Elsewhere in the top 10, however, there were a few changes, with Singapore's Central Provident Fund nudging past China's National Social Security Fund, Beijing, to take eighth place with $406.7 billion in assets. China's NSSF had $347.2 billion in assets.

The California State Teachers' Retirement System, West Sacramento, with $290.4 billion, displaced the Pensioenfonds Zorg en Welzijn, Zeist, of the Netherlands to take 10th place. PFZW slipped two places to 12th, with $231.8 billion in assets.

The remainder of top 20 retirement plans remained the same from 2021, except for a new entrant in 20th place, the Employees' Provident Fund of India, New Delhi, which had $158.7 billion in assets in 2022, up 9.4% from $145 billion the previous year. Russia's National Wealth Fund, Moscow, fell out of the top 20 list with $140.4 billion in assets in 2022, down 22.4% from $181 billion in 2021.

These top 20 funds made up 41.5% of the top 300's total asset value in 2022, up from 41% in 2021.

The share of Asia-Pacific funds in the top 20 rose to 43.1% from 41% as asset value fell by 7.3%, while the share of European funds fell to 23.7% from 26.5% as their asset value fell 21.1% during the year. The share of U.S. funds held steady at 26.1%, and asset value fell by 11.8%.

Defined benefit assets accounted for a majority of total assets disclosed by the top 300 funds, but continued a downward trend as defined contribution plans made up a growing proportion of assets. DB assets fell 15.2% to make up 62.2% of total assets, down from a 63.5% share in 2021.

DC assets fell 9.2% and represented 25% of total assets in 2022 compared to 23.8% a year ago, reserve fund assets fell 13.1% and its share remained unchanged at 11.8% of total assets, and hybrid plan assets decreased by 0.7%, making up 1% of total assets compared with 0.9% in 2021.

"Although DB is shrinking, there's a huge legacy within what we already have in the pool ... The DB funds, there are still public pensions in there and a lot of public pension funds remain open," Ms. Gao said. "(But) if we look at our other studies, there is a definite trend that DB is decreasing over the years," she added.