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Defined contribution pension savings in 22 leading countries have surpassed defined benefit pensions for the time.

The Global Pension Assets Study from Willis Towers Watson’s Thinking Ahead Institute reports that the what it calls the P22 now have US$ 40,173 billion in pension assets accounting for 60 per cent of the GDP of these economies.

The growth of DC – reflecting increased member coverage and in some markets higher contributions – started 40 years ago and is continuing at a steady pace while in some markets DB coverage has declined.

The assetss of what the report calls ‘the P22’ now total US$ 40,173 billion in pension assets and account for 60 per cent of the GDP of the economies concerned.

The study includes an analysis of the seven largest markets (the P7) Australia, Canada, Japan, Netherlands, Switzerland, UK and US which comprise 91% of total global pension assets.

The report suggest that it has been pensions regulation and employer practice that has been behind this movement away from traditional DB pensions. It says this includes US 401k enactment in 1978, Australia Superannuation Guarantee in 1992 and UK auto-enrolment in 2008

Yet the report argues that DC is still weakly designed, untidily executed and poorly appreciated. It suggests it will take better design and engagement models to create meaningful contributions to retirement security.

2018 was third worst year

In terms of the P7, 2018 was the third worst year in the last 20 due the challenging markets losing 3.3 per cent in value, but the 5-year 2.9 per cent per annum and 10 year 6.5 per cent per annum are more revealing of the longer term pattern.

It notes that the 20-year growth in pension assets in Australia has been 10.2 per cent per annum. It says the critical features in this success have been government-mandated pension contributions, a competitive institutional model and the dominance of DC.

The 20-year growth of DC in the P7 has been 7.6 per cent per annum relative to 3.2 per cent per annum for DB. DC has worked better for employers who have had declining appetite for taking pension risk during this 20-year period.

Since 1998 equity allocations have reduced from 60 per cent to 40 per cent while allocations to other assets (real estate and other alternatives) have increased from 7 per cent to 26 per cent. Allocation to cash and bonds remains the same as in 1998 for P7 markets.

Domestic equity bias reducing

There is a clear sign of a reduced home bias in equities, as the weight of domestic equities has fallen, on average, from 68.7 per cent in 1998 to 40.2 per cent in 2018. During the past ten years, the US has had the highest allocation to domestic equities, while Canada, Switzerland and the UK have had the lowest allocation.

Roger Urwin, global head of investment content at the Thinking Ahead Institute, said: “Three things really stood out in 2018. First, we’ve reached a pivotal moment in the DC pension assets growth story, as they exceed DB pension assets for the first time, after a slow and steady grind over 40 years. But despite its long history, DC is still weakly designed, untidily executed and poorly appreciated.

“Second is how much funds have benefited from private market diversification. 2018 was the third worst year for pension asset growth in the last 20, but it would have been quite a lot worse without the contribution from private markets that produced important risk diversification.

“Third, Australia undertook two significant reviews of its superannuation fund industry through 2018 into 2019 and surfaced a number of far-ranging criticisms. This scrutiny seems to have the potential to give the Australian industry more sensitivity to member value premised on better engagement and considerably more efficiency.

“Pension funds continue to face a range of issues over the next five to ten years. These include the shifting focus in pension design towards a DC model, the growing impact of evolved regulations and further integration of ESG, stewardship and long-horizon investing.”

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