$23.6 trillion in assets sets record for plans

Assets of the world’s 300 largest retirement plans rose 8.9% last year to a record $23.6 trillion, in what could prove a bittersweet end to an unprecedented era of easy money, according to the latest annual survey by Pensions & Investments and Willis Towers Watson PLC’s Thinking Ahead Institute.

Last year’s healthy gain was smaller than the 11.5% surge logged in 2020, when policymakers around the world put economic stimulus into overdrive to counter — arguably with too much success — the COVID-19 pandemic’s paralyzing effects on the global economy.

By late 2021, that tidal wave of stimulus had unleashed inflationary pressures, aggravated further by Russia’s February invasion of Ukraine. The biggest price increases in decades forced central bankers to take their feet off the accelerator and begin applying the brakes. U.S. Federal Reserve Board Chairman Jerome Powell, in an Aug. 26 speech, stressed that the Fed’s 2.25 percentage points of federal funds rate hikes since March will be followed by further tightening until U.S. inflation — still over 8.5% at the end of July — drops back to the Fed’s 2% target level.

The bleak market outlook that policy about-face promises for 2022 should stifle any inclination among fund overseers to celebrate the latest year’s record retirement savings totals, Thinking Ahead Institute executives said.

It’s “the end of an era,” said Marisa Hall, London-based co-head of the Thinking Ahead Institute. After talking about “lower for longer” for ages, “suddenly pension board trustees are grappling with the fact that there’s no such thing as cheap money anymore,” forcing them to think anew about where they’re going to get their returns from, she said in an interview.

The paradigm shift to an environment of high inflation, monetary tightening and interest rate hikes is prompting trustees to rethink their options now that equities are no longer the simple answer to their risk asset allocation needs — a difficult position to be in, Ms. Hall said.

On Aug. 26, in the wake of Mr. Powell’s tough speech, the S&P 500 index plunged 3.4% to 4,057.66. That brought the U.S. stock benchmark’s decline since the start of 2022 to roughly 15%, following gains of 26%, 16% and 28% over the prior three years. Over the same span, the MSCI All World Composite index tumbled roughly 17%, following gains for the previous three calendar years of 18%, 16% and 26%.

While the scope for change in how retirement overseers will opt to position their portfolios going forward is considerable, some recent trends look set to persist in this year’s harsher environment, including growing demand for private markets allocations and an ever-greater focus on sustainability, TAI executives said.

With retirement plan participants ever more focused on the ESG and sustainability fronts, the “ESG train” will continue to chug along, even as it poses increasingly complex challenges for trustees amid the tougher macroeconomic backdrop, Samar Khanna, a London-based associate director, research with the Thinking Ahead Institute, noted in the same interview.

Larger pension funds are increasingly adopting a “universal ownership mindset,” recognizing that the returns they’re seeking come from a system that works and that they have a role to play in strengthening that system, Ms. Hall agreed.

Working on the resilience of the system, for example, by engaging with companies they invest in to create better companies comes back full circle in the form of better returns and being able “to deliver a world that pensioners want to live in,” she said.

To some extent, regional differences in grappling with ESG-related issues are becoming more pronounced of late, TAI executives said.

In contrast to Europe, where the ESG steamroller continues to push ahead, there have been recent instances of increased politicization of the topic in U.S. states such as Florida and Texas, where politicians are pressuring board trustees not to take ESG factors into consideration, Ms. Hall noted.

Such headwinds should ultimately prove more helpful than harmful, she said, calling sustainability an “unstoppable train.” When it comes to thinking about such a radical shift in mindset, the kind of debates being seen now in the U.S. are healthy because “you need to constantly test the robustness of the argument” or risk undermining the legitimacy of the narrative, she said.

If the future is uncertain, the latest survey’s 8.9% gain in retirement assets was “a bit of a good news story for pension funds,” with the tide remaining strong enough to lift most boats, Ms. Hall said.

In the latest top 300 rankings, Japan’s Tokyo-based Government Pension Investment Fund retained bragging rights as the world’s biggest retirement fund, even as the weakening of the yen vs. the dollar last year almost completely offset the GPIF portfolio’s double-digit gain in local currency terms. The fund’s assets in dollar terms climbed a scant 0.6% last year to $1.73 trillion.

That allowed Norway’s Oslo-based Government Pension Fund Global — in second place with a 10% gain in dollar terms to $1.44 trillion — to narrow GPIF’s lead in the rankings to roughly $300 billion from $400 billion the year before.

South Korea’s Jeonju-based National Pension System remained in third place with $798 billion, up 4.3% amid an almost 10% depreciation of the Korean won vs. the dollar. The Washington, DC-based U.S. Federal Retirement Thrift Fund likewise held on to fourth place, up 19% at $774.2 billion, followed again by Heerlen, Netherlands-based Stichting Pensioenfonds ABP, at $630.4 billion, up 3.8%.

U.S. fund data were as of Sept. 30, 2021 while non-U.S. fund data were mostly as of Dec. 31, 2021.

Only two retirement funds rotated into the top 20 for the latest year.

Austin-based Texas Teachers Retirement System, on the back of a 21% gain in assets to $196.7 billion, claimed 17th place in the rankings, up from 21st place the year before.

Melbourne-based AustralianSuper, meanwhile, became the first fund from Australia’s $2.3 trillion retirement industry to join the largest of the large, edging up to 20th place from 22nd the year before on the strength of an 8.2% rise in assets to $169.1 billion.

The latest survey’s “industry trends” section highlighted the “notable consolidation of superannuation funds” in Australia in recent years, with AustralianSuper — the country’s largest industry fund — an active player in that regard, most recently absorbing Sydney-based Club Plus Super’s members and their A$3.2 billion ($2.2 billion) in assets in December and LUCRF Super, a Melbourne-based fund with A$6 billion in assets in June of this year.

Those new entrants displaced New Delhi’s Employees’ Provident Fund Organization, which dropped to 28th place in 2021 from 16th place in 2020 on the back of an estimated 25% plunge in assets to $145 billion, and Hillerod, Denmark-based ATP, which fell to 24th place from 19th as its portfolio declined 12% in dollar terms.

The seven U.S.-based funds in the top 20, meanwhile, delivered uniformly strong gains, ranging from Sacramento-based California Public Employees’ Retirement System’s 16.6% gain — good enough to secure sixth place with $496.8 billion in assets — to West Sacramento-based California State Teachers’ Retirement System’s 21% gain to $313.9 billion — enough to comfortably maintain 11th place.

CalPERS took that sixth place position from Beijing’s National Social Security fund, which slipped to eighth place on the back of a 9.3% drop in dollar-denominated assets to an estimated $406.8 billion.

For the latest top 20, the only other funds that saw their assets decline in dollar terms were Malaysia’s Employees Provident Fund, Kuala Lumpur — down 2.3% to $242.6 billion, in part due to successive early access programs that allowed members to tap their retirement savings for COVID-19 relief — and the Moscow-based Russian National Wealth Fund, down 1.3% at $180.7 billion.

The $9.68 trillion in assets held by the 20 largest retirement funds at the close of the latest year accounted for 41% of the top 300’s combined AUM, down slightly from 41.8% the year before. The top 300’s $23.6 trillion in assets, in turn, came to 41.7% of the Thinking Ahead Institute’s latest annual estimate of global pension assets, at $56.6 trillion, up marginally from 41% the year before.

In addition to the currency tailwind, North America’s relatively strong gains last year likely reflected, in part, a relatively heavy weighting to equities in a year when U.S. benchmark stock indexes posted strong gains.

In the top 300, the survey showed funds based in North America with a weighted average allocation to equities of 54.7%, while Asia-Pacific and European funds had respective allocations of 49.8% and 48.8%.

By contrast, Asia-Pacific funds had the largest allocation to fixed income, at 41.6%, slightly ahead of European funds’ 39% weighting and more than double the average U.S. fund allocation of 19.6%.

North American funds, meanwhile, had a 25.6% allocation to alternatives, more than double the allocation by European funds of 12.1% and almost triple the 8.7% allocation of Asia-Pacific funds.

European funds in the top 20 had a weighted average allocation to equities of 59.2%, topping the 56.1% allocation by the biggest North American funds and the 48.8% weighting for the biggest Asia-Pacific funds.

Those heavyweight Asia-Pacific funds had a weighted average allocation to bonds of 45.5%, topping the 29.8% weighting of European funds and dwarfing the 16.1% allocation by North American funds.

The seven biggest U.S. funds, meanwhile, had 27.8% of their portfolios invested in alternatives, while their European and Asia-Pacific counterparts had 10.9% and 5.7% respectively.

By type of retirement plan, defined benefit assets accounted for 63.5% of total plan assets for the top 300 plans, edging up from 63.4% the year before. Defined contribution plans accounted for 23.8% of total assets, down from 23.9% in 2020.

Assets in reserve funds, set aside by governments to cover future retirement costs, stood at 11.8% of the total, down from 11.9%. And hybrid plans that incorporate both DB and DC components came to 0.9% of the total, down from 1% the year before.

North America had the biggest proportion of DB assets, at 72.7%, followed by the Asia-Pacific region with 65.2% and Europe with 51%. Those figures compared with 73.7%, 64.7% and 51%, respectively, the year before.

North America likewise had the biggest proportion of DC assets, at 27.3%, edging out the Asia-Pacific region with 25.8% and Europe at 11.2%. In 2020, those DC figures stood at 26.3%, 25.8% and 11.2% respectively.

European funds in the top 300, meanwhile, had 34.4% of their assets in reserve funds, almost four times the 9% weighting in the Asia-Pacific region.

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