Just as big investment returns made 2023 a banner year for the funded status of U.S. corporate-sponsored pension plans, they did the same for total global pension assets.
The latter swelled by a healthy 11% last year, reaching $55.7 trillion, according to Willis Towers Watson’s Thinking Ahead Institute (TAI), which released its annual study on the topic.
That was an about-face from 2022, when pension assets suffered their steepest annual decline since the global financial crisis, more than 15 years ago. The growth resulted largely from strong performances by capital markets. TAI estimated that the return for a “reference portfolio” of 60% global equities and 40% global bonds stood at 16.6% in the 12 months through December 2023.
Despite the surge, pension assets remain behind their pre-2022 position.
“This global growth is not yet rapid, but it is far better than the experience a year before,” said TAI director Jessica Gao. “Inflation has moderated, and as a result financial markets have remained supported by interest rates, which also appear to have peaked, at least for now, in most countries.”
The TAI study focused on a group of 22 countries (the P22) that accounted for the vast majority of total invested assets. Among that group, 91% of assets were held in seven countries (the P7): Australia, Canada, Japan, Netherlands, Switzerland, the United Kingdom, and the United States. The U.S. alone accounted for two-thirds (64%) of the total P22 assets.
Other notes from the TAI study:
- The report warned that systemic risk (or the possibility of a malfunction of the pension system) is continuing to rise. The principal areas of such risk are geopolitical confrontation, climate change, biodiversity loss, inequality and social division, and financial system plumbing. “The investment industry is scrambling to develop robust models to measure and adapt to systemic risk,” the report said. “Organizational resilience has emerged as a crucial concept for the industry to become adaptable to a more difficult operating environment.”
- Government influence on pension plans is high, as governments look for new ways to fund efforts to overcome “capital-hungry systemic issues” such as energy transition, climate change mitigation, and sustained technology growth.
- The long, slow shift from defined benefit (DB) plans to defined contribution (DC) plans continued. At the end of 2023, among P7 countries 58% of global pension assets were in DB plans, 42% in DC plans. “However,” TAI observed, “there is growing sentiment that this shift may be going too far, with concerns about the adequacy of retirement income and the loss of financial security among retirees.” IBM’s recent decision to reopen its defined benefit plan after being frozen for 15 years “reflects a recognition of the limitations of DC plans in delivering secure and predictable retirement income.”
- Also continuing was an elongated decrease in assets allocated to equities. Where such allocation was 51% twenty years ago, it’s edged down to 42% now. Allocation to bonds was 36% in both 2003 and 2023, while “other” asset classes, from real estate to infrastructure to private equity, have climbed from 12% to 20% of allocated assets.
The P22 refers to the 22 largest pension markets included in the study which are Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Spain, Switzerland, the U.K. and the U.S.