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The business of retirement policies: must-read reports and analysis

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Global Pension Industry


A pension plan is a type of retirement plan, often tax exempt, wherein an employer and/or employee contribute to a pool of funds set aside for an employee’s future benefit. The funds are then invested, allowing the employee to receive benefits on retirement (as sort of a income insurance once his/her carreer ends).


According to Tower Watson, pension assets worldwide are worth over $35tn, equal to more than 50% of global GDP. Some of the largest pension funds are the Japanese and Norwegian governments’ funds, ABP of The Netherlands, the National Pension of South Korea and the U.S.’s Federal Retirement Thrift.


New regulations, the administrative complexity of these new rules, sustainability constraints and declining interest rates are some of the key challenges for the retirement fund sector.


Key Segments


The two key segments of the pensions industry are defined benefit (DB) and defined contribution (DC) schemes.


In DB plans an employer promises a specified retirement benefit that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending directly on investment returns. Traditionally, many governmental and public entities, as well as a large number of corporations, provided defined benefit plans.


In DC schemes both employee and employer contributions are usually fixed as a percentage of salary. These contributions are invested to provide the retirement benefits. DC schemes do not provide any guarantees, and the benefits at retirement will depend on a number of different factors, including fund performance, plan charges and the annuity rates available at the time of retirement.


DC assets represent about 45% of global pension assets and in the past have grown faster than the DB assets. While DC is dominant in the U.S.A. and Australia, DB has an above 95% share in Japan, Canada and the Netherlands and about 75% in the UK.



Regional Market Shares


The top five retirement savings markets are the U.S.A., the UK, Japan, Australia and Canada. Other countries in the top ten are the Netherlands, Switzerland, Germany, Brazil and South Africa.  


The U.S.A.’s is the largest retirement fund industry, with assets over $18tn, equal to over 60% of the industry’s worldwide assets. DC assets are about 60%; the rest are DB assets. The largest U.S. pension funds include the California Public Employees’ Retirement System (CalPers), North Carolina State Pension Fund and the New York State Common Retirement Fund.


The UK is the world’s second largest market with assets over $3tn, equal to about 130% of its GDP. They have risen by more than 60% since 2003. The largest manager of UK pension assets is Legal & General Investment Management, followed by Insight Investment Management and BlackRock.


Japan, with assets also over $3tn, is third largest. According to the country’s Investment Advisors’ Association (JIAA), Japan’s top three retirement fund managers are Sumitomo Mitsui Trust Bank, Mizuho Trust & Banking and State Street Global Advisors. Although the domestic players hold the top two positions, foreign firms occupy 12 of the top 25 places.


Australia is the fourth largest market with total pensions assets around $1.5tn. Australian pensions have been investing more money in the U.S.A., Europe and emerging markets, and in stocks such as Google Inc. and Walt Disney Co. Australian Super Pty is the largest pension fund manager in the country.


Economic reforms in Africa are fostering the growth of retirement assets and making the nascent market an attractive target for Western investors. The largest manager of pension assets in the continent is South Africa’s Public Investment Corp. Other key players include ARM in Nigeria and Petra Trust in Ghana. Africa’s fast-growing sovereign wealth funds are expected to offer leadership and guidance to pension funds as they expand.


The Middle East pension sector is set to expand as more young people enter the workforce. In many countries the sector is supported by oil wealth.  Private pension plans in the Asia-Pacific region are also expected to increase rapidly, creating new opportunities for fund managers.


Market Outlook


 Some of the key trends witnessed in the global pension market include an increasing shift towards DC, increasing risk appetite, and in-sourcing.


Globally, there is a discernible shift away from DB schemes in favor of DC plans. This process is driven by a mix of demographic and financial trends, with life expectancy levels rising significantly at a time when governments worldwide are coming under greater fiscal pressures, making the unlimited exposure of DB schemes unpopular.


To drive growth and meet long-term liabilities, pension fund institutions are taking on increased risk and making a major shift in allocations to less-familiar asset classes such as alternative investments. Recently, pension funds have been the biggest single source of money flowing to venture capital.


Cost is the major driver for insourcing. In order to deliver cost savings, most pension funds intend to increase the share of their portfolio managed in-house.


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