Asset allocation of pension funds

Nga Pham, CFA    Nga Pham, Ph.D, CFA
16 May 2019
Categories: Other, Investment Management

Country or region: Asia Pacific (Overall)

The Australian Centre for Financial Studies presents a special report on asset allocation of pension funds, based on the data collected by the Melbourne Mercer Global Pension Index project from 2009 to 2018.

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The primary objective of funded pension arrangements is to provide adequate incomes for retirement. Pension contributions and investment return on accumulated funds during an individual’s working life and retirement years are the key factors that affect retirement incomes. Long-term pension investment returns are driven by asset allocation of pension plans.

As asset allocation of pension funds around the world is so diverse, the Australian Centre for Financial Studies (ACFS) dedicated a special report to the topic of “asset allocation of pension funds” based on the data collected by the Melbourne Mercer Global Pension Index (MMGPI) project from 2009 to 2018. MMGPI data was provided by Mercer consultants.

The main objective of the report is to understand this diversity, its drivers and its implications.

Report highlights:
  • From 2010 to 2018, on average, pension funds in our surveyed pension systems allocated 38.7% of their assets to growth assets. The level of growth assets in pension portfolios was stable over time.
  • Pension systems differed significantly in their level of investment in growth assets, due to differences in the management approaches, market conditions, and institutional constraints. The top five pension systems, including Argentina, Peru, South Africa, Australia, and Saudi Arabia, allocated more than 60% to growth assets. Singapore, Korea, and India have less than 10% in growth assets.
  • Large pension markets, P7 as classified by Willis Towers Watson, namely Australia, Canada, the Netherlands, Japan, Switzerland, the US, and the UK, had higher allocation to growth assets.
  • There are fewer restrictions on investing in growth asset classes for pension funds in large pension markets, especially P7.
  • Pension funds in private systems (countries with mandatory occupational savings managed by private institutions) tend to have higher allocation to growth assets than those in public systems.
  • No clear difference in asset allocation pattern was observed among defined contribution (DC) and defined benefit (DB) systems.
  • Overall, considering the total household wealth portfolio including both pension investment as well as other activities related to non-pension assets and liabilities, we observe that pension systems with high level of growth assets tend to have high household debt, low savings and low home ownership, and vice versa.

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