Asia-Pac pension funds lose ground on peers

Asia Pacific pension funds saw their AUM decline last year among the top 300 such funds globally – the only region to experience a drop, according to research released yesterday by Towers Watson*.

Moreover, in terms of annualised growth over the five-year period 2008-13, pension funds from Asia Pacific experienced the lowest rate of any region at 4.5%, behind Latin American and African funds with 16.1% (from a low base), Europe (12%), global (7.3%) and North America (5.6%).

Asia Pacific funds saw their AUM share of the world's top 300 slip to 24.7% last year, a steady decline from 26.3% in 2012 and 28.1% in 2011.

However, Naomi Denning, managing director of investment services for Asia Pacific at Towers Watson, forecast their poor performance would not last long. She attributed the fall to the negative performance of Japanese pension funds, which have been heavily invested in fixed income.

She noted, too, that the Abenomics stimulus programme in Japan that led to the depreciation of the yen had also caused the asset value of Japanese funds to be lower in US dollar terms.

“Japan has the biggest pension fund in the world [Government Pension Investment Fund]. Even a few percentage-point change in its performance is going to make a big difference to Asia,” Denning said. “Also, emerging markets haven’t done as well, generally, and Asian funds have a bit more exposure there.

“With the contribution levels that continue to go into Asian pension funds, there’s no reason that they should trend behind other markets. They have significant amounts of new money going into their new systems."

Denning reflected that another issue afflicting Asian pension funds was the lack of developed annuity systems. “Most Asian pension systems pay out lump sums. When someone retires, their money is withdrawn completely, whereas in developed markets some assets are managed after retirement."

She expects annuities to increase across the region as pension schemes such as Hong Kong’s Mandatory Provident Fund (MPF) explore how retirees can retain assets for longer in funds.

In terms of the latest research, the AUM of the world's 300 largest pension funds totalled $14.9 trillion in 2013, a year-on-year increase of 6.2%, compared with a 9.8% growth rate in 2012.

North America remained the largest region by AUM with 41.4% of top 300 assets, up from 40.5% in 2012. It was followed by Europe at 29.5%, up from 28.5%.

Interestingly, defined benefit funds accounted for 66.7% of total assets last year, with 140 funds in the top 300. That was down from 68.5% in 2012. Overall DB assets grew by just 2.6% in 2013, compared with 15% for reserve funds, 9.4% for defined contribution funds and 8.2% for hybrids.

Again, this would have affected the growth rate because DB plans dominate in Asia Pacific, where they represent 70.4% of assets in their AUM ranking. Still, DB accounts for 78.5% in North America, but only 53.7% in Europe and 20.6% in 'other' (predominantly Latin America).

“The biggest Asia DB market is Japan, but it has started to introduce DC," said Denning.

"We expect that to continue, with DB growth slowing. Most of the other Asian markets that have been running for a relatively short period of time are continuing to build up their DC assets,” she added.

She observed that pension funds in Asia were increasingly looking at alternative assets, notably hedge funds. “Hedge funds suffered in the financial crisis and had fallen out of favour, but the crisis probably helped the industry by putting pressure on fees, especially for long-term pension money being committed."

A total of 38 new pension funds have entered the top 300 ranking over the past five years. On a net basis, the countries that contributed the most were Australia (three) and South Korea, Russia, Poland, Colombia and Canada (each with two).

Three new funds made it into the 2013 list. Vietnam joined the club with its Social Insurance Fund ranking 280th, while Australia’s HOSTPLUS entered ranking 290th and Korea’s Government Employees Pension joined at 273rd.

In the global top 20, China’s National Social Security fund (AUM $205 billion) moved down two notches to eighth and Malaysia’s Employees Provident Fund ($182 billion) slipped a spot to 11th.

The climbers were Singapore’s Central Provident Fund ($200 billion), which rose one place to ninth, and Japan’s Local Government Officials ($180 billion), which climbed five places to rank 12th.

* Pensions & Investments and Towers Watson jointly published their global 300 list yesterday.