Beyond their Borders - Evolution of foreign investments by pension funds

2020 Edition

The low interest rate environment that we find ourselves in, exacerbated by central bank policies, continues. Given the increasing volatility of public markets, many pension funds have reduced their equity allocation. Combined, these have called some pension funds’ investment strategies into question. How can they, in the most sustainable way, meet their long-term mandates and help individuals save?

In light of these factors and the current global investment environment, pension funds, with their ability to weather periods of market instability, are also upping their allocations to alternatives, including notably illiquid assets such as real estate and infrastructure. In their search for diversification, pension funds are not only looking in terms of asset class, but also geography. They are going beyond their borders in their search for growth – either through direct investments or, increasingly, using funds such as AIFs or UCITS.

In this report we provide a detailed analysis of the current global pension market, highlighting the trends that are propelling the industry forward. We also examine the benefits that pension funds can reap when investing through funds such as UCITS and AIFs.

The years ahead might be tough for the pension industry given the rising pressure placed on systems globally, but there are opportunities to be found – if one knows where to look.

Pension asset growth by region, 2004-2025e (US$tn)

Retirement assets saw steady growth between 2014 and 2018, rising at 3.2% compound annual growth rate (CAGR) to reach US$ 42.2tn. Pension fund assets also saw healthy growth in recent years, rising by US$ 4.9tn in the four years between 2014 and 2018. Pension funds continue to hold the bulk of assets among institutional investors, accounting for approximately 52% of the market in 2018.

Global pension’s asset allocation (US$tn)

Equity continues to hold the crown in terms of asset allocation, accounting for 38% of total assets in 2018. Despite low interest rates, bonds remain a core of pension fund portfolios. Bonds accounted for 29% of global pension fund assets, up from 28% in 2014. 

Overseas investments of pension funds for selected countries in 2018

The majority of countries analysed do not set any limits regarding foreign investments. Nonetheless, some countries have issued maximum percentages that can be invested in non-OECD or non-EEA countries (e.g. Czech Republic, Denmark, and Finland). Moreover, some countries have issued different limits for specific asset classes (e.g. Chile and Colombia). Although the regulatory landscape of the pension markets has generally remained unchanged since 2014, we have witnessed some changes.

The rise of DC

For the first time since its introduction 40 years ago, DC has overtaken DB as the most popular pension arrangement. DC pensions hold more than 50% of the seven  largest pension markets’ total assets, compared to 30% back in 1998.

Contact us

Dariush Yazdani

Dariush Yazdani

Market Research Centre Partner, PwC Luxembourg

Tel: +352 49 48 48 2191

Xavier Domalain

Xavier Domalain

Market Research Centre Director, PwC Luxembourg

Tel: +352 49 48 48 6057

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