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Pensions Blow Chance to Influence Corporate Practices

Booming markets pushed global pension assets to a record high last year.

Pension funds are missing a massive opportunity to use their heft for corporate good globally, according to Willis Towers Watson.

Amid rising global markets, the value of pension fund assets around the world rose 13.1 percent last year to $41.3 trillion, the highest level since the consulting firm started tracking the figures in 1997.

Yet few pensions have taken advantage of their investments in companies to influence stewardship globally, according to a Willis Towers Watson report expected to be released Monday. These large asset managers could introduce their environmental, social and governance beliefs into their investment strategies to affect positive change.

“The 20-year story is one of missing the opportunity to influence and mitigate corporate misalignments – like executive pay, and other poor leadership and boardroom practices,” the consulting firm said in the report.  

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Individual investors may also have more opportunity to influence the conversation surrounding ESG. Within two years, the value of global assets in defined contribution plans, such as 401(k) programs, will be larger than those in defined benefit pensions, according to a Willis Towers Watson statement accompanying the report.

Over the last 20 years, defined contribution assets increased at an annual rate of 7.9 percent, while traditional pension plan assets rose 4.5 percent annually. DC plans represented 60 percent of total assets in the U.S. as of the end of 2017, up from 54 percent in 2007.

Steve Carlson, North America head of investments for Willis Towers Watson, says the growth of DC assets has gained momentum as an increasing number of corporations have closed their defined benefit plans. He said the move to DC is also happening at the state and municipal level, but more slowly.

The good news for DC plan participants is that corporations have been increasing their contributions to employees’ accounts.

“Corporate America is starting to wake up to the fact that the standard model of employees contributing 6 percent and the company matching that at 3 percent isn’t going to cut it,” Carlson in a phone interview.

Private asset classes have boomed over the past two decades within retirement plans. “The asset allocation to real estate, private equity and infrastructure in the 20-year period has moved from 4 percent to 20 percent,” Willis Towers Watson said.

Asset allocation at pension funds varied widely among countries in 2017.

In Australia, for instance, pensions held 49 percent in equities, 14 percent in bonds, 15 percent in cash and 22 percent in other assets. In the U.S., asset allocations included only 1 percent cash, 50 percent in equities, 21 percent in bonds and 28 percent in other assets.

Australia, which requires individuals to save for retirement, has seen pension assets jump at an annual 12.1 percent over the past two decades, far higher than other developed nations.

“The critical features in this success have been government-mandated pension contributions, a competitive institutional model, and the dominance of DC,” Willis Towers Watson said.

In the U.S., changes to corporate tax laws are motivating companies to make contributions to their pension plans, which will result in healthier pensions, according to Carlson. “We anticipate you’ll see a pickup in funding levels because of these contributions,” he said.

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