Assets under management (AUM) at the world’s top 300 pension funds increased by 11.5% to a total of $21.7trn (£15.8trn) last year, despite numerous challenges caused by COVID-19.
That is according to new research by the Thinking Ahead Institute, which shows that North America remains the largest region in terms of AUM, accounting for 41.7% of all assets, followed by Europe and the Asia-Pacific, both on 27.5%.
The annual research also shows that the US continues to have the largest number of funds in the top 300 ranking with 138, followed by the UK, Canada, Australia and Japan, with 23, 18, 16 and 14, respectively.
Defined benefit (DB) fund assets continue to dominate at 63.4% of the total AUM, however, their share has been declining modestly over the years, as defined contribution funds, reserve funds and hybrid fund assets gain traction.
Marisa Hall, co-head of the Thinking Ahead Institute, said that pension fund boards are increasingly focused on managing many of the headwinds that have arisen from the pandemic and a “new normal” of lower-for-longer interest rates.
This has prompted concerns around solvency and led some schemes to increasingly stretch their risk budgets in order to meet return targets, while managing rising ESG expectations has created its own set of challenges and opportunities.
“As a result, pension fund boards’ agendas have become more complex and demanding than at any previous time,” Hall continued.
“While some larger funds use best-practice governance to retain a strategic focus in the face of this complexity and explore more dynamic investment models such as total portfolio thinking, other schemes are using this as an opportunity to review their governance models to ensure they remain sufficiently robust.”
The research also shows that the top 20 pension funds’ AUM – which constitute 41.8% of the total – grew by a 14.6% in 2020, which was the second-highest annual growth rate since 2004.
The top 20 fund assets are predominantly invested in equities, followed by fixed income, and alternatives and cash, on 46.6%, 36.3% and 17.1%, respectively, on a weighted average basis.
However, these funds have, in aggregate, slowly increased their allocation to alternatives during the past few years in order to meet return-target goals.
Hall said that a shift in focus to meet “the investment challenges of tomorrow”, such as achieving net-zero targets and ensuring real-world impacts, is prompting pension fund boards to adopt a more holistic and agile approach as they revamp their people, investments and business models.
She added: “Boards which are successfully managing this transition have employed the power of technology, governance and culture ingeniously. Other pension fund boards are taking notice.”
Image credit: iStock
Author: Chris Seekings