DB pensions dominated the UK market, accounting for 81 per cent of assets
The UK is the world’s third largest pension market, after it was overtaken by Japan in 2020, with assets totalling $3.6trn (£2.58trn), according to Willis Towers Watson (WTW).
The provider’s Thinking Ahead Group published the estimates for 2020 in its annual Global Pension Assets Study, stating that the UK pension market had recorded a compound growth rate of 4.6 per cent over the last decade.
The UK’s ratio of pension assets to gross domestic product (GDP) rose to 135 per cent during 2020, with the global ratio climbing 11.2 per cent to a record high of 80 per cent as GDPs of countries were hit by the Covid-19 pandemic.
Defined benefit (DB) pensions dominated the UK market, accounting for 81 per cent of assets, although defined contribution (DC) pensions were the world’s dominant pension model, accounting for 53 per cent of pension assets across the top seven markets (P7), rising from 35 per cent in 2000.
The P7 include Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US. While the US represents 62 per cent of worldwide pension assets, the UK represents 6.8 per cent.
Globally, DC assets rose 8.2 per cent per annum over the last decade, compared with the 4.3 per cent growth achieved by DB assets during the same period.
Australia had the highest proportion of DC assets, accounting for 86 per cent of its pension assets, while DB pension assets of Japan and the Netherlands were 95 per cent and 94 per cent respectively.
Moreover, out of the P7, the UK had the smallest allocation (8 per cent) to alternative assets such as real estate versus the average of 26 per cent, while its allocation to bonds and equities were 65 per cent and 26 per cent respectively.
Thinking Ahead Institute co-head, Marisa Hall, said: In what was a highly tumultuous year, pension funds continued to grow strongly in 2020, underpinned by ongoing multi-decade themes such as the rotation from equities to alternatives and the growth of DC, now the dominant global pensions model.
This paints a picture of a resilient industry in good health and relatively well placed to weather the effects – economic and otherwise – of the ongoing pandemic. This is good news for billions of savers around the world, Hall said.
However, this shouldn’t mask the growing set of challenges that industry leaders face, particularly around addressing broader stakeholder groups’ needs and wants, while continuing to deliver financial security for their fund members, she said.
She said, we believe one of the main challenges for pension funds, and opportunities for impact, is the effective stewardship of their assets. It is clear that the unstoppable ‘ESG train’ is picking up pace, and in some cases is being turbo-charged by climate change and the accelerating path to net zero.