A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/global-pillars-systems
https://expatpensionholland.nl/global-investments-risks-0
https://expatpensionholland.nl/global-social-security-coverage
B] The Issue
We will now mention several interesting pension investment developments:
C] Global Pension Investments
Global pensions assets rose by 4.9% year-on-year in 2024, reaching a record USD 58.5 trillion, led by growth in the largest DC markets, according to the Thinking Ahead Institute’s (TAI) latest Global Pension Assets Study. This compares to USD 55.7 trillion at the end of 2023, when the same study by the TAI measured a return to growth after the sharp fall in global pension assets in 2022. Despite the rise in overall assets, there are significant differences between regions.
The US remains the biggest pensions market by far with a significant 65% share of global pension assets, and when combined with the next three largest pension markets – Japan, Canada, and the UK – these four regions equate to 82% of all global pension assets. Looking specifically at the largest seven pension markets globally – which also include Australia, Netherlands and Switzerland – Defined Contribution (DC) now accounts for 59% of total assets compared to just 40% in 2004. This shift is being driven by DC schemes’ higher exposure to growth assets, which has seen DC assets grow by 6.7% pa since 2014, while defined benefit (DB) assets grew at a slower pace of 2.1% pa.
While there has been relatively little change in the ranking of these seven largest pension markets over the last 20 years, the growth in some regions, primarily those with larger DC markets, is far outstripping others. Since 2014, the size of Australian pension assets has grown by 110% in local currency and in US it has grown by 75%. Both markets have a substantial skew towards DC pension funds, with 89% of Australian assets in DC and 69% of US assets in DC schemes.
Notably, the Australian market has experienced phenomenal growth with the size of assets having increased by nearly 500% over the last 20 years. Should its current growth trajectory be maintained, it could become the second largest pension market globally by 2030.
When assessing growth rates in local currency in the major pension markets, the UK was the only country in the study to exhibit negative annual growth over the past year, at -0.7%. This decline is consistent with long term data. The UK recorded the slowest growth among P7 countries over the past 10 years, with its global share of pension assets declining from 8.8% of the largest 22 markets in 2014 to 5.4% in 2024.
In the previous year, only a quarter of UK assets were formed of DC pensions, whereas an overwhelming three-quarters were formed of DB pensions. Of the top 7 pension markets, the UK allocated the largest proportion to bonds at 56%, closely followed by Japan at 55%.Jessica Gao said: “The rise of DC becomes more pronounced every year that we conduct this study. While global pension assets continue to reach new record levels, it is those markets with larger pools of DC assets that are the main engine behind this continued growth. As the size of these asset pools continues to increase, we are seeing increased influence by governments towards pension funds, primarily through regulation, which has expanded in line with both the size and growing significance of pensions in society. This has been particularly evident in countries such as Canada, Australia, and the UK.”
Jonathan Grigg added: “While the falling Australian dollar tempered growth in assets in 2024 in USD terms, Australia’s superannuation assets have outpaced other major pension markets over the long-term due to a combination of the rising superannuation guarantee and a strong bias towards defined contribution – which has led to higher growth portfolios. Despite the introduction of the Your Future, Your Super performance test in 2021 and the resulting increased focus on benchmark-relative returns, the allocation to alternatives has marginally increased since 2019, from 23% to 24%. The bigger shift has been an increase to equities, which has risen from 47% of portfolios to 52% over the past five years, mainly funded from cash.”
D] Asset owners increasingly aware of ESG risks
Close to two-thirds of asset owners are now incorporating nature and biodiversity into their sustainability strategies whilst a further one-fifth intend to do so, according to a survey by Pensions for Purpose, the UK-based industry body. The report was based on interviews with 20 asset owners and managers across the UK, Europe, Asia-Pacific, North America and Latin America. These included the Bedfordshire Pension Fund, Cambridge Associates, PGGM, JANA Investment Advisers and the Wiltshire Pension Fund.
Asset owners are “at a critical point in their nature and biodiversity journeys,” said the First Sentier MUFG Sustainable Investment Institute, which commissioned the report. As more funds engage with the Taskforce on Nature-Related Financial Disclosure (TNFD) framework, “clarity is being sought on key motivations, challenges and gaps as the need for the theme to be integrated more deeply into portfolios progressively strengthens.”
As previously reported by Impact Investor, the European Investment Bank and the WWF struck an agreement in November to speed up climate adaptation in Europe by developing nature-based solutions aimed at addressing the twin crises of climate change and biodiversity loss. A recent WWF Living Planet Report found that species populations have declined by 35% on average in Europe and Central Asia since 1970.
Asset owners cited financial risk as a key driver to integrate climate concerns and nature and biodiversity into their schemes. One asset owner said it had started to realize that ignoring nature-related risks was not just a sustainability issue, but could also impact the bottom line. “A large portion of GDP depends on natural capital, yet we’ve taken resources like water, clean air and timber for granted. We’re beginning to realize these resources are finite or renewable only if managed responsibly.”
Although there is growing momentum among asset owners to incorporate nature and biodiversity into their sustainability strategies, investors face “considerable challenges” when it comes to reporting on nature-related risks, according to the report. While there is plenty of biodiversity data available, the problem lies in the variety of the data available, and its interpretation. While climate metrics, such as greenhouse gas emissions, are more standardized and widely accepted, asset owners told the report authors that applying quantitative metrics on nature often didn’t provide them with “the full picture”.
“In our research, we concluded that three points are essential to helping asset owners on their journey,” Bruna Bauer, research manager at Pensions for Purpose. 1] Asset owners should start with educating their decision-makers on the basics of nature-related risks, opportunities, impacts and dependencies. 2] Asset owners should leverage existing climate efforts in, for example, ESG to include nature, which “can prevent the process from becoming exhausting”. 3] “Partnerships with external organizations can supplement internal efforts and bridge gaps caused by a lack of internal expertise”, Bauer said.
Some asset owners lamented a lack of suitable investment opportunities in biodiversity, with one citing the lack of liquidity and viability as a factor. “One key issue is that nature and biodiversity are still primarily viewed through the lens of risk mitigation rather than opportunity,” Bauer said. In order to change this narrative, “it’s essential to highlight the financial value of preserving and restoring ecosystems”.
Ultimately, increasing confidence in nature-related investments “will depend on showcasing success stories”, Bauer said, adding demonstration projects, case studies and collaborations with organizations like the TNFD can provide inspiration for investors. Most of the asset owners Pensions for Purpose spoke to weren’t actively looking for investable opportunities because they were still at the stage of monitoring risk, impacts and dependencies on nature, according to Bauer.
“By addressing data gaps, rethinking risk in emerging markets and reframing biodiversity as an opportunity, asset owners can begin to overcome these barriers and integrate nature-focused investments into their portfolios,” Bauer said.
E] Pension Plan Managers foresee increased risk
Coming into 2025, many US pension plan managers are looking at what poses the biggest risks to their plans on both the assets side and the liabilities side. In fact, 84% of US pension plan managers expect the coming year to bring an elevated risk profile, according to a new online survey from Ortec. The survey targeted senior pension fund executives in the US whose plans collectively manage $670.4 billion in assets.
In 2024, the bulk of those surveyed already saw risks rising. Half (50%) of those surveyed said their risk profile increased slightly last year and 6% reported their risk increased considerably. Around 42% reported their risk profile remained the same and only 2% said their risk decreased.
Managers expect these rising risk profiles to continue into the coming year. Of those surveyed at the beginning of Q4 2024, 58% said the risk profile of their pension fund will increase slightly for the coming 12 months, with another 26% believing their risk profile will increase dramatically. Only 16% believe their risk profile will stay the same in 2025.
Diving into the largest risk drivers, managers report a mixture of concerns which stand to impact both the assets of their pension funds as well as their expected liabilities. When asked to rank their largest risk concerns, the top five risks in order of concern are:
- Cybersecurity
- Market volatility
- Regulatory
- Rising longevity
- Inflation
- Finally climate change and geopolitical risks
From the assets side, market volatility and inflation stand to potentially erode asset value, while from the liabilities side, rising longevity poses a risk of increasing liability value.
Looking closer in on the liabilities side, 66% of those surveyed believe the increasing number of retirees relative to the number of new hires in Defined Benefit plans poses a significant or slight risk to the Defined Benefit Pensions industry. Their top five risk concerns may result in both lower assets and also higher liabilities in 2025. The combination of decreased assets and increased liabilities can lead to a dampening of the overall funding health of a plan.
Despite the presence of risks for both assets and liabilities coming into 2025, the grand majority of those surveyed assess the risks of either assets (38%) or of liabilities (30%), but not both. Less than a third (32%) of those surveyed assess the risks of both assets and liabilities with only 18% of the managers saying they assess the risks of both assets and liabilities in a combined manner. The other 14% said they do assess both assets and liabilities but in isolation from one another.
Richard Boyce explains the value of assessing assets and liabilities together saying, “We believe assessing the risks of both assets and liabilities in combination is crucial to get the full picture on the health of a pension fund. If the impacts of risk drivers are only understood for one side of the funding health equation, then it is possible to misrepresent the overall effect. Take as an example, the scenario of a pension fund assessing interest rate risk as the Federal Reserve is signaling rate hikes.
For the assets side, increased rates can potentially erode asset value as equity markets respond negatively and bond prices decline. Whereas on the liabilities side, increased rates can mean a higher discount rate and thus also a lower liability value. If a fund is not assessing both assets and liabilities, then it is difficult to conclude the overall impact of interest rate hikes on the plan’s funding ratio.”