Biggest funds increase 11.5% to hit $21.7 trillion in 2020

Assets of the world's 300 largest retirement funds increased 11.5% to $21.72 trillion in 2020, despite the effects of the coronavirus pandemic that ravaged stock markets and economies in the first half of the year, according to the latest annual survey by Pensions & Investments and Willis Towers Watson PLC's Thinking Ahead Institute.

The top funds' assets also grew at a faster rate than a year earlier, when they increased by 8%.

Most markets quickly recovered from the effects of the pandemic, said Marisa A. Hall, London-based co-head of the Thinking Ahead Institute, who added that the S&P 500 index was back to pre-pandemic levels by August 2020 and notched more than an 18% total return in 2020.

Over the past five years, assets increased by an annualized 7.9% for the 300 funds and 8.9% for the largest 20 funds in that group.

The latest survey showed that the challenging environment of the past year focused retirement plan executives on adapting their investment processes to encompass what Ms. Hall described as a total portfolio governance approach rather than traditional strategic asset allocation and three-dimensional investing that includes risk, return and impact. A total portfolio strategy requires funds to have specific investment goals and consider all investment opportunities rather than a set of traditional asset classes.

"The pandemic has reminded everyone how interconnected the world is," Ms. Hall said. "Pension funds have to deal with increased levels of complexity," she said, adding that they have needed to become more sophisticated to manage a lower-for-longer macroeconomic environment and growing ESG expectations around sustainability goals.

Because of these demands, funds will be looking for more opportunities, such as exploiting assets in private markets, to solve their solvency concerns and to meet the challenge of transitioning to a low-carbon economy over the next five to 10 years, she said.

However, she added, for some funds, their governance structure and culture need to improve to match these challenges.

"Challenges such as net-zero are encouraging asset owners to rethink their governance structures and move to an arrangement that better allows them to meet that goal," she said.

To address the "complexity and ambiguity" of these challenges, retirement plans will require strong "T-shaped" teams that have both skills and expertise in a single field as well as the ability to collaborate across disciplines, she added.

"Pension asset growth has continued to closely match global public market equity and bond returns," Ms. Hall said. "Boards continue to manage against the headwinds that have arisen from a new normal of lower-for-longer interest rates and heightened market uncertainty, diversifying more to be able to mitigate some of the shocks through a move to private markets."

From 2015 through 2020, the survey showed a strong correlation between plan size and asset growth, with the 20 largest funds delivering annualized asset gains of 8.9%, ahead of the next 30 largest funds (7.8%) and the smallest of the 300 (6.5%).

Despite the economic upheaval caused by the pandemic, the survey's 20 largest funds saw their combined assets climb 14.6% to $9.09 trillion in 2020 — which represented a 41.8% share of top 300 assets compared with 40.7% a year earlier.

The top 300's assets, in turn, amounted to 41.3% of the $52.52 trillion in global pension assets estimated by the Thinking Ahead Institute's annual global pension asset study.

North American funds overall held the largest share of assets, at 41.7%, among regions, although that slid from 43.8% in the prior survey. Meanwhile, European funds increased to 27.5% from 25.8% the year before and Asia-Pacific funds grew to 27.5% from 26.6%.

However, the U.S. is still the largest market in the world, and it has 62% of the global pension market, followed by Japan, Ms. Hall said.

Because some funds are maturing and are paying out more in promised benefits, it was expected that some funds' assets would drop, she said.

Both U.S. and Japan have populations that are aging, compared with some emerging markets.

Ms. Hall reiterated that the largest funds grew their assets at a faster pace compared with other funds due to more evolved governance structures that allowed them to harvest better market returns. Funds with a total portfolio governance approach have done quite well, she said.

"There is a material link between performance and strong governance models. As funds try to meet more complex sustainability goals such as net-zero and achieving real-world impact, they need to reassess their capabilities and resources. We are starting to see funds move toward a total portfolio governance approach as a means of meeting these objectives," she said.

Over the past five years, Asia-Pacific funds in the top 300 posted annualized growth of 9.9%, exceeding North American funds' 7% growth and European funds' 7.8% growth. Latin America and African funds combined grew by an annualized 5.7% over the five years.

The top 20 rankings in the latest survey saw some changes, including China's $448.4 billion National Social Security Fund and Russia's $183 billion National Wealth Fund improving their positions, moving to No. 6 and 17, respectively, from No. 7 and No. 25.

China's National Social Security Fund increased its assets 24.2% over the year, while Russia's National Wealth Fund boosted its assets 46%.

Overall, European funds grew as a share of the top 20 to 28.4% from 25% in 2019, while both U.S. and Asia-Pacific funds recorded declines to 21.7% and 43.7% from 25% and 44%, respectively.

European funds in the Top 20 saw their combined assets increase 30.4% for the year, ahead of a 13.9% increase for Asia-Pacific funds and a 0.8% decline for U.S. funds in the top 20.

The $162.6 billion Teacher Retirement System of Texas, Austin, fell out of the top 20 in 2020, moving to 21st from 19th.

U.S. fund data was as of Sept. 30, 2020, while the non-U.S. fund data was mostly as of Dec. 31, 2020.

In the latest ranking, the top three funds remained in the same position as they all saw their assets increase over the course of the year. The Government Pension Investment Fund, Tokyo, remained on top with a 9.6% gain that lifted its assets to $1.72 trillion at the end of the year. It has occupied the top spot since 2002. But it was Norway's Government Pension Fund Global, Oslo, that saw its assets increase the most among the top three funds. The sovereign wealth fund's assets grew 22.4% over the year to $1.31 trillion.

The third largest fund was South Korea's National Pension Service, Jeonju, which reported a 20.1% gain in assets for the year to $765.4 billion.

Asset allocations for the top 20 funds saw slight changes over the year during the pandemic.

Irrespective of their domicile, investors increased their allocations to equities. Ms. Hall said that in the lower-for-longer environment, organizations sought to improve returns in a particularly challenging year.

"It is probably not a surprise" that investors continued to stretch their risk budgets to meet return targets through investing in private markets, with the additional benefit of using these as vehicles for meeting sustainability goals, she added.

A simple average for the top 20 funds showed a 41.7% equity weighting, up from 40.2% the year before, as equity markets rebounded strongly from a plunge in first half of the year.

Bonds accounted for 35.6% on average, down from 37.6% in 2019. Alternatives and cash stood at 22.7%, edging up marginally from 22.2%.

A weighted average of the top 20 funds, meanwhile, showed a higher exposure to equities, at 46.6%, up from 45.4% the year before, while bond allocations slipped to 36.3% from 36.8% and alternatives and cash dropped to 17.1% from 17.8%.

Regional weighted averages for those top 20 funds showed that Asia-Pacific funds had the biggest allocations to bonds, which increased over the year to 53.2% up from 51.7% a year earlier, and the smallest allocations to alternatives and cash, at 3.4%, down from 5.4%.

North American funds in the top 20, by contrast, had the biggest alternatives and cash allocations at 37%, up from 34.8% a year earlier, and the smallest allocation to bonds, at 18.6%, down from 21.3% a year earlier.

The survey showed that European funds, with the heaviest allocations to equities at 53.6%, increased their equity allocations from 50.9% a year earlier, followed by North American funds that invested 44.4% of their portfolios in the asset class in 2020, up from 43.9% a year earlier. Asia-Pacific funds increased their equity allocations as a share of their portfolios to 43.3%, up from 42.9% a year earlier.

For the latest year, defined benefit plans accounted for 63.4% of the top 300 assets, down slightly from 64.2% in 2019 while defined contribution plans accounted for 23.9%, down from 24.2%.

Assets in reserve funds, which are set aside by a national governments to guarantee pension payments in the future, rose to 11.9% of the total top 300 assets from 10.9% a year earlier, while hybrid plans, which combine DB and DC features, rose to 1% from 0.8%.

North America and the Asia-Pacific region continued to be dominated by DB assets, representing 73.7% and 64.7% of total assets in those regions, respectively, with Europe reporting 52% of its assets in DB plans in 2020.

Meanwhile, North America reported 26.3% of its assets in defined contribution plans, followed by the Asia-Pacific region with 25.6% and Europe with 12%.

Reserve funds make up 32.4% of European assets, dominated by Norway's Government Pension Fund Global.

Compared to 2019, the share of DB funds slightly decreased in all regions. In 2019, in North America 74% of assets were run by DB funds, while in Asia-Pacific, 65.1% of total assets were in DB funds. In Europe, that share was 53.2%.