The rest of the world is following the U.S. lead in embracing the defined contribution model of retirement savings plans, with Americas employer-sponsored plans taking a huge share of global assets. And with those huge assets come huge risks, according to analyists.
Nearly half (47%) of retirement plan assets within the 16 largest international pension markets (known as the P16) is held in DC plans. DC assets are expected to overtake DB assets in the next few years, according to the latest Towers Watson Global Pension Assets Study.
A significant component of that growth, however, is attributable to a rapid increase in DC assets held in the U.S. The American share of the $17 trillion in P16 DC total is $13 trillion, or 76% of the total. Total U.S. retirement plan dollars grew by 9% last year, versus 6% for the P16 total.
Total retirement plan assets within the 16 top pension markets (which account for an estimated 85% of the global total) stand at about $36 trillion, according to the study.
DC plan assets in the U.S. now stand at 58% of the combined DB/DC total, up from 47% a decade ago.
DC shift has consequences
The global momentum in favor of the DC model will have consequences. In a statement released along with the survey results, Steve Carlson, Towers Watsons Americas investment practice, warned that this shift brings a transfer of risk and new tension to the balance between ownership and control, which will test governments and pension industries around the world.
The overall growth rate for retirement plan assets in the P16 cooled off a bit in 2014, to 6% from 10% in 2013. (All growth rates in the study encompass both net contributions and investment returns.)
A higher growth rate would be required within the DB sector to strengthen those plans. While there has been a significant improvement in various pension balance sheets around the world since the financial crisis, many DB pension funds are still in very weak funded positions, Carlson said. However, he added, the U.S. pension plans are in a better position, given the contribution flexibility.
U.S. pension plans also typically have significant flexibility when it comes to where to invest. Yet the domestic bias for equity investments the proportion of total equity investments in domestic corporations is highest in the U.S.
According to the study, 67% of pension dollars invested in equities were invested in U.S.-based companies, a percentage that has risen over the past three years. During the same time, the P16 equity bias has declined, to 43% last year, down from 65% in 2008.
This may be explained in part by the fact that the aggregate capitalization of U.S. publicly held companies is significantly larger than that within other P16 countries, implying that non-U.S. pensions seeking a significant allocation to substantial corporations have had little choice but to load up on U.S.-based companies.
Another investment trend noted in the study is the increased allocation to alternative assets generally real estate, hedge funds, private equity and commodities. That allocation rose from 5% in 1995 to 25% last year. U.S. pensions have the greatest appetite for alternatives, with a 29% allocation last year.
The P16 countries are, in addition to the U.S., Australia, Brazil, Canada, France, Germany, Hong Kong, Ireland, Japan, Malaysia, Mexico, the Netherlands, South Africa, South Korea, Switzerland, and the United Kingdom.
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