For all the expense and complexity that it takes to build their holdings, global pensions are losing out to a portfolio that they could implement in a day. But pension funds remain committed to increasing their exposure to private equity, real estate, and other alternatives, according to a new report from Willis Towers Watson’s Thinking Ahead Institute.
Released Monday, the institute’s annual global pension assets study found that assets in the average global pension fund increased by 15.2 percent measured in U.S. dollars for the calendar year 2019. The top seven pension funds showed an average annualized increase of 15.8 percent, also measured in U.S. dollars. These figures are in contrast to the 19.3 percent generated by a portfolio made up of 60 percent global stocks and 40 percent global debt over the same time period.
The asset growth figures include contributions paid in and benefits paid out, but the Thinking Ahead Institute noted these amounts are very small compared to the size of assets and market growth.
Over the past ten years — a long bull market — pensions are also losing. For the decade ending in December 2019, global pension fund assets increased by 6.5 percent annually. Assets for the top seven pension funds, which include Australia, Canada, the U.K., and U.S., increased by 6.4 percent. The 60/40 benchmark increased by 6.8 percent annually over the decade.
WTW’s report covers 22 pension markets, including Germany, Hong Kong, India, and Japan, with almost $47 trillion in defined benefit and defined contribution assets.
John Delaney, senior director, investments and portfolio manager at the Thinking Ahead Institute, noted that these results have to be seen in the context of the past decade being the best on record for the performance of simple equity and bond portfolios.
“The trend is the opposite [of a simple portfolio.] Pensions are adding more alternatives. I think we’ll see that continue, even if it’s not a large increase from here,” Delaney told Institutional Investor. “Pensions could get simpler diversification, but the strategy has to be at the right risk level.”
The Thinking Ahead Institute reported that alternative investments have skyrocketed in popularity over the past 20 years.
“The asset allocation to real estate, private equity and infrastructure in the 20-year period has moved from about 6 percent to almost 23 percent,” according to the report. “Alternatives have been attractive for return reasons, offsetting their governance difficulties.”
Delaney stressed that equity and bond valuations are “fairly stretched. You have to look at other things and we see that on the [defined contribution] side.”
He added that it’s more difficult to add alternatives to defined contribution plans, but the new SECURE Act — Setting Every Community Up for Retirement Enhancement, passed late last year — may help ease that.
Among other sweeping retirement changes, the SECURE Act creates some protections for multi-employer plans. Multi-employer plans would be able to make decisions about investment options without worrying about the risk of being sued.
“If multi-employer plans takes off, that could be an opportunity for alternatives to take off in DC plans,” said Delaney.
Assets of the 22 pensions funds studied in the report increased in 2019, from $40.6 trillion to $46.7 trillion. The average global asset allocation for the seven largest pension markets was 45 percent in equities, 29 percent in bonds, 23 percent in other asset classes, and 3 percent in cash.
As of 2019, the seven largest pension markets are also split almost evenly between defined contribution and defined benefit assets. Last year was a big performance improvement over 2018, which was the third-worst year for the top seven markets.
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When it comes to alternative investments, the Thinking Ahead Institute said pensions are getting more creative to better align interests between allocators and asset managers and to expand access. Many are doing more co-investments, for example, where they are putting up money alongside private markets managers. Others are exploring innovative vehicle structures, such as interval funds, which offer investors periodic liquidity.
“There is an acknowledgement that there is a way to get better access to private markets ideas,” said Delaney. “Historically, it’s been a relationship business, with the best PE funds always being oversubscribed. Broader access to these double-digit returns is a good goal.”