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Pensions Still Have the Scale, but Sovereign Wealth Funds Are the Fastest Growing Institution

In 2020, pensions controlled most of the assets of the world’s 100 largest allocators, but the sovereigns were the ones to watch.

Pension funds continue to control a dominant piece of the world’s assets, but sovereign wealth funds are growing faster and innovating, according to a Willis Towers Watson Thinking Ahead Institute report released Tuesday. At the end of 2020, the assets of the top 100 allocators reached $23.5 trillion, a 16.4 percent increase over 2019. 

Pension funds held 58 percent of the total assets of the top 100. Sovereign wealth funds held 35 percent of global assets, and outsourced chief investment officers, or OCIOs, and master trusts controlled the remaining 7 percent. 

According to Roger Urwin, WTW’s global head of investment content, the growth, particularly among pension funds, was “respectable” and “not that remarkable.” Urwin said the steady growth among the world’s top 100 funds and the predominance of pension funds are simply a product of how the market moves. “There hasn’t necessarily been as much money going into these funds because pension funds are relatively mature, but they are growing faster than [inflation],” Urwin told Institutional Investor. “It’s actually the sovereign wealth funds [that have picked up the pace] a little.” 

Out of the top 20 largest funds in the world, ten are sovereign wealth funds (representing 52.5 percent of the top 20), nine are pension funds (45 percent), and one is an OCIO (2.9 percent). “Sovereign wealth funds started later but have been growing faster,” Urwin said. “Pension funds have [enjoyed] their faster growth [but are now] paying out a lot more. Sovereign wealth funds continue to accumulate assets, meaning that the nation-states that run [them] continue to put money into [them].” 

In North America, the percentage of assets in pension funds is even higher than the global average. Here, pension funds represent 77 percent of assets, while OCIOs represent 23 percent. No foundations or endowments were large enough to fit WTW’s criteria for the top 100 asset owners. The largest pension funds, as a result, tend to have an outsized influence on the industry at large due to their sheer scale. “The Americas have been in the pension area the longest,” Urwin said, “[and] the behaviors of the top 100 [funds] trickle down.” 

As an example, the report said that top asset owners have devoted increased attention to themes like sustainability and corporate governance and culture. In the wake of the United Nations Climate Change Conference (COP26), asset owners face even more pressure to reach goals like net-zero emissions. “This is a defining moment in the industry,” Urwin said. “The [top 100] organizations are widely studied for how they’re going about it, because [pursuing two goals at one time is] a new investment model.” 

Among the world’s top 20 funds, 47 percent of assets were invested in equities, followed by fixed income at 35 percent. Alternatives represented only 18 percent of the asset allocation in the top-20 fund portfolios. 

Over the next decade, Urwin said he expects the top fund types to continue their expansion and influence. He said he thinks that pension fund assets will double, and that sovereign wealth funds could grow to perhaps two and a half times their current size. “They’re setting new industry standards for how they’re practicing and what the outcomes look like,” he said. 

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