Global DC pension assets projected to outgrow DB in two years

Global defined contribution plan assets are growing faster than defined benefit pension assets, according to a new report by the Thinking Ahead Institute and Willis Towers Watson.

Over the past 20 years in the seven largest pension markets (Australia, Britain, Canada, Japan, Netherlands, Switzerland and the United States), defined contribution plan assets grew at a rate of 7.9 per cent per year, while defined benefit plans only grew by 4.5 per cent annually, the report found.

“DC now accounts for 49 per cent of total assets across the seven largest pension markets in the world as these funds continue to experience positive net cash flow and relatively lower levels of benefit withdrawals compared to their DB counterparts,” said Roger Urwin, global head of investment content at Willis Towers Watson, in a press release.

Read: Top 50 DC Plans Report: A look at the latest governance trends

“As such, we would expect DC assets to become larger than DB assets within the next two years. With DC models in the ascendancy, it is important that governance issues and the shift in risk on to the end saver are closely monitored, without regulation becoming a burden and hindering the ability of DC plans to deliver optimal outcomes.”

The report also found that global pension fund assets rose to US$41.3 trillion at the end of 2017, up by US$4.8 trillion during the year, the single largest one-year growth in the last 20 years. It noted global pension funds have experienced steady asset growth at a yearly average rate of 6.2 per cent, but this past year was up significantly with a rise of 13 per cent.

“While the short-term figures are positive these are due to unusually high market returns,” said Urwin. “Looking back at 20 years of progress makes for encouraging reading. In particular, the improving position of pension assets as a proportion of GDP and the evolution of pension fund governance, which has risen up trustees’ agendas and is certainly a lot stronger as a result.”

Read: Strong growth, equities help pooled funds deliver 8.6% in 2017

In equity investing, the report found home bias has dropped significantly in the past 20 years, from 68.7 per cent to 41.1 per cent. Canada is among the countries with the lowest allocation to domestic equities, along with Britain and Switzerland, while the United States maintains the largest allocation.

“Risk management and diversification continue to be a significant focus for asset owners, as epitomized by the inexorable rise of private assets over the lifetime of this study, rising from as little as four per cent of allocations in 1997 to around 20 per cent today,” said Urwin. “As our understanding of these asset classes has increased, so has the sophistication of strategies in allowing funds to go beyond traditional means of diversification.”

Urwin noted another ongoing focus will be the “challenge for countries with aging populations to accommodate increased benefit payments. We note a much-increased use of liability-driven investment strategies. We also are seeing traditionally DB-focused countries showing signs of a shift towards adopting DC pension plans,” he said.

Read: Plan sponsors eager to take risk off the table