Australia has the Fourth Largest Pension Fund Assets in the World

22 Feb 2019

Tags

  • Edmund Tang
  • Australian Economy

Last year, Australia remained the world's fourth largest pension (locally called ‘superannuation’) market valued at US$1.9 trillion and also experienced the highest growth rate of pension fund assets in the world, according to the Willis Towers Watson Global Pensions Asset Study - 2019.[1] The latest figure for Australia's pension assets represented a compound annual growth rate (CAGR) of around 10.2% between 2008 and 2018 (in US$ terms). This rate was well above the global average rate of 5.3% over the same period.

Australia's pension assets rose to 131% of GDP in 2018, up from 67% a decade ago. This latest ratio was the second highest among the 22 major pension markets covered by the survey. The findings illustrate the significance and long-term growth of Australia's pension system, which is a major driver behind the country's rapidly expanding, globally significant managed funds (MF) industry. Australia's asset pool of MF is the sixth[2] largest in the world and the largest in Asia with total assets of around US$2.1 trillion in the third quarter of 2018, according to a separate survey conducted by the US-based Investment Company Institute.

Australia's MF industry has been dominated by domestic pension funds which have accounted for around 96% of the country's total MF assets. Total consolidated assets of Australia's MF have surged from A$245 billion in 1991 to A$3.5 trillion in 2018.[3] Willis Towers Watson in the 2019 Study has particularly highlighted the significance of Australia's pension system that “the critical features in this success have been government-mandated pension contributions, a competitive institutional model and the dominance of DC.”[4]

The 2019 Global Pensions Asset Study found that:

  • Global institutional pension fund assets in the 22 major markets covered by the study were estimated at US$40 trillion in 2018, representing an average growth rate 5.3% over the past decade
  • By asset value, the US remains the world's largest pension market (accounting for 61.5% of the world total), followed by Japan (7.7%), the UK (7.1%), and Australia (4.6%)
  • In US dollar terms, the assets of the pension markets of the US and UK have risen by 7.7% and 7.1% a year respectively since 2008, while the Japanese market has dropped by 0.7% per annum. Over the same period, Australia's pension assets have grown much faster, at a CAGR of 10.2% a year
  • Ten-year figures (in local currency) show that the Netherlands grew their pension assets the most as a percentage of GDP, with the ratio increasing by 78 percentage points (ppt) to reach 167%, followed by Australia (up 64 ppt to 131%), the UK (53 ppt to 102%), and the US (40 ppt to 120%). Over the same period Japan’s pension assets to GDP ratio has fallen by five ppt to 61% of the GDP
  • When compared to the other members of the world's seven largest pension markets (known as the P7 in the Study)[5], Australia has the highest proportion in defined contribution (DC) assets (86%) relative to defined benefit assets (14%).[6] In contrast, Netherlands, Canada and Japan have the highest proportion in defined benefit assets of around 95%
  • At the end of 2018, the average global asset allocation of the P7 was 40% equities, 31% bonds, 26% other assets (including real estate and other alternatives) and 3% cash. Over the same period, Australia and the US continued to have above average equity allocations, with 47% and 43% respectively. Japan and the Netherlands have higher allocation to bonds, while Switzerland has the most even allocations across equities, bonds and other assets.

 

Global pension assets

 

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[1] The 2019 study covers 22 major pension markets, which total US$40 trillion in pension assets and account for 60.4% of the GDP of these economies.

[2] Figures for Hong Kong and Singapore are not included in the survey of the Investment Company Institute (ICI).

[3] Australian Bureau of Statistics Cat. No. 5655.0 Managed Funds, Australia, Table 1.

[4] Willis Towers Watsons Global Pension Assets Study 2019, page 8

[5] Willis Towers Watson's deeper analysis for the seven biggest markets (P7) – USA, UK, Japan, Australia, Canada, Netherlands and Switzerland.

[6] Retirement plans for employees are generally divided into two types. The first is a defined contribution (DC) plan, where the employee contributes a set amount of money each pay period, and upon retirement the amount contributed and any interest or profits made on those contributions will become available to be drawn down at the discretion of the employee. The second type of plan is the defined benefit (DB) plan, where an employee is guaranteed a pre-determined payment at the time of retirement based upon the amount of time that the employee works for an employer prior to retirement.