For the first time, defined contribution plan assets are exceeding defined benefit holdings across the world’s six largest pension markets, according to new report by Willis Towers Watson’s Thinking Ahead Institute.
The report also found DC plan assets have grown at a faster rate (8.4 per cent per annum) than DB plans (4.8 per cent per annum) over the past decade. DC plans are the most dominant in Australia and the U.S., while markets like Canada and Japan, traditionally heavy on DB plans, are increasingly embracing DC, it noted.
But DC plans still face certain challenges as they mature, including member engagement. More detailed levels of customization are on the horizon, the report said, as the DC market builds new ways to target members. “The future of DC is likely to be hyper-customized, with increased focus on individual participants, but employers need to improve governance to embrace this.”
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The report also found assets across the world’s 22 largest markets reached more than US$46.7 trillion in 2020. The bulk (92 per cent) of those assets are held by the top seven markets, which include Australia, Canada, Japan, the Netherlands, Switzerland, the U.K. and the U.S.
Strong equity growth helped push assets higher, with 22 markets seeing an average gain of 15 per cent. The highest gains were in Mexico (22.2 per cent), Canada (18.9 per cent) and the U.S. (17.8 per cent).
Allocations to private markets and other alternative assets are also on the rise, now sitting at 23 per cent of overall pension portfolios. The push reflects a strong demand for risk diversification as the addition of these assets continue to squeeze traditional equity and bond holdings.
The report also noted that sustainability will be an important factor for pensions in the coming decade, especially where climate change is concerned. With the significant capital they control, pensions will be operating in a financial system where thought leaders and impact-minded investors are pushing for a more purposeful capitalism.
“These leaders follow a mantra aligned with a principle that ‘the pensions we pay are worth more in a world worth living in.’ In particular, universal owners have worked on broadening their interpretation of fiduciary duty, which has involved looking for opportunities to secure and improve the financial system.”
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