Total assets of the world’s largest 300 pension funds grew by under 2% in 2011 (11% in 2010) to reach a new high of US$12.7 trillion, according to Pensions & Investments and Towers Watson research. The P&I / Towers Watson global 300 research, conducted in conjunction with Pensions & Investments, a leading US investment newspaper, shows that last year’s growth in assets was the lowest since 2003 except for the -13% decline in 2008.

By individual region, Asia-Pacific has the highest five-year growth rate of 9% compared to Europe (6%) and North America (0%); while the Latin American and African regions combined have a growth rate for the same period of under 8%, albeit from a low base. The research also shows that the world’s top 300 pension funds now represent over 46% of global pension fund assets.

According to the research, Defined Benefit (DB) funds account for 70% of total assets. During 2011, DB assets grew by over 1% (8% in 2010) compared to under 4% for Defined Contribution assets (DC) (13% in 2010), while Reserve Funds grew by over 1%.

Carl Hess, global head of Investment at Towers Watson, said: “Asset allocation for the world’s largest pension funds has changed markedly during the past six or seven years to be much more defensive in view of the on-going economic uncertainty. The top 20 funds, on average, now have roughly equal amounts in equities and bonds (c. 40% each) and the rest in alternatives and cash. At the same time Asia-Pacific funds, in particular Japan, have maintained much higher allocations to bonds in keeping with prevailing investment beliefs and risk tolerance there.”

According to the research, the US remains the country with the largest share of pension fund assets accounting for over 34%, although this has declined steadily over the last decade. Japan has the second-largest market share of over 17% (18% in 2010), largely because of the Government Pension Investment Fund. That fund, which is still at the top of the ranking (a position it has held for the past nine years), has assets of around US$1.4 trillion and maintains a conservative asset allocation. The Netherlands has the third-largest market share with over 6%, while the UK and Canada are fourth and fifth largest respectively with over 5% share each. The research shows that 47 new funds entered the ranking during the past five years mainly from Australia, Mexico, Germany, Finland and Russia. During the same period, the US had a net loss of 19 funds from the ranking, yet it still accounts for 121 funds in the research. The UK is the next highest with 27 funds, down two funds from five years ago.

Carl Hess said: “The combination of a low-growth economic outlook and stubborn liabilities presents pension funds around the world with a significant set of challenges if they are to meet all their promises. Foremost among these is the growing competition among big investors globally for increasingly scarce returns. In addition, they have to dynamically adapt to a riskier environment with shakier economic foundations and increasingly volatile, unpredictable markets. As such many of the top funds are prioritising governance and risk management arrangements as a matter of urgency, spurred on by the increasing likelihood of benefit default if they don’t.”

The research shows that assets held by Australian funds grew at the fastest rate during the five-year period to the end of 2011, 18% in US$ terms, followed by Brazilian with 14%. During the same period the top Mexican, Danish, Taiwanese and Japanese funds grew at 11%, 10%, 9% and 6% respectively, in US$ terms.

Sovereign funds continue to feature strongly in the ranking with the 26 of them accounting for 29% of assets and totalling US$3.7 trillion. The 109 public sector funds in the research had assets of US$4.9 trillion in 2011 and account for 39% of the total. Private sector industry funds (60) and corporate funds (105) account for 13% and 19% respectively of assets in the research.

Carl Hess said: “Another year of relatively low growth figures in many markets and ballooning liabilities in others is yet more proof that we face a challenging investment environment for a number of years to come. Added to this are the extra demands being made on many large investors to consider their broader social responsibilities, which includes sustainability. We believe that only those with the very best governance arrangements are likely to maximise their chances of satisfying these demands while achieving the future returns they need to improve and lock in better solvency positions.”