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Pension Asset Growth Outpaced GDP Over Last 10 Years

The value of U.S. pension assets has outpaced GDP growth over the last decade, according to data from Towers Watson.

In that time frame, pension assets have grown at a rate twice that of the country’s GDP.

Pension investments in stocks, bonds, cash and alternative assets such as real estate have surged relative to the country’s gross domestic product over the last decade. The value of U.S. pension assets jumped over 89% while GDP rose roughly 42%, according to data from consulting firm Towers Watson & Co.

Those investments were worth an estimated $22.1 trillion last year, 127% of the country’s $17.4 trillion gross domestic product. That’s the highest percentage on record, and up nearly 32 percentage points from a decade earlier.

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U.S. pension investments accounted for more than 61% of the $36.1 trillion global total. That total is 84% of global GDP. Global pension assets relative to global GDP are up roughly 15 percentage points from the decade earlier.

The dollar is strong relative to foreign currencies, and U.S. companies have more money available, which widens the disparity, Mr. Ruloff said. U.S. pension plans last year made 67% of their equity investments in U.S. stocks, according to Towers Watson.

Towers Watson reported last month that global pension asset values reached all-time highs in 2014.

Towers Watson: DC Assets Will Overtake DB Assets in Next Few Years

A Towers Watson study has found that global defined-benefit pension fund assets are at an all-time high – $36 trillion – but defined-contribution assets could soon overtake them.

From a press release:

The Towers Watson study also shows that defined contribution (DC) assets grew rapidly for the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%, versus a rate of over 4% for defined benefit (DB) assets. As a result, DC plan assets have grown from 38% of all pension assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years. In the U.S., DC assets continued to climb steadily and now represent 58% of all assets, up from 52% in 2004 and 55% in 2009.

“The continuing shift to DC plans means they are becoming the world’s most prevalent retirement savings model,” said Steve Carlson, head of Towers Watson’s Americas Investment practice. “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 study found that only two countries had more DC assets than DB assets: the United States and Australia.

As mentioned in the excerpt above, DC assets represent 58 percent of all U.S. pension assets.

The trend is more pronounced in Australia, where DC assets represent a whopping 85 percent of all pension assets.

Photo credit: TaxCredits.net

Video: Africa Pension Executive Talks Investment Strategy, Funding

Here’s an interview with John Oliphant, principle executive of the Government Employees Pension Fund.

The GEPF is the largest institutional investor in Africa; it manages $114 billion in pension assets for over a million workers.

Oliphant talks about the fund’s investment strategy, performance and funding progress.

Philadelphia Pension Board Appoints Interim CIO

The chief investment officer of Philadelphia’s Board of Pensions, Sumit Handa, announced his plans to resign earlier this month.

He officially left the post on January 15.

Now, the Board has appointed an interim CIO to take Handa’s place while a search for a long-term CIO plays out.

From Philly.com:

Francis Bielli, executive director of the Philadelphia Board of Pensions and Retirement, will be serving as the board’s interim chief investment officer, while the board conducts a search for a new CIO.

The board asked Bielli to put on a second hat, following Sumit Handa’s recent resignation. Handa, who was hired in 2011 to manage the investments of the underfunded $5 billion Philadelphia city workers’ retirement plan, is going back to the private sector, said Rob Dubow, pension board chairman and city finance director.

Bielli’s salary will get a $35,000 bump, totaling $204,000, to fill in the second job, the board announced at its meeting Thursday. A national search will be conducted to find a replacement for Handa.

Bielli will oversee the management of $4.7 billion in pension assets.

Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg

Cincinnati Councilman Proposes Changes to Pension Investment Strategy

Cincinnati City Councilman Christopher Smitherman has proposed a series of changes to how the city’s pension money is managed.

The proposals stem from concerns about transparency and high money management costs. Smitherman also wants to change the makeup of the investment board.

The fund returned 16 percent in 2013.

From the Cincinnati Enquirer:

Specifically he is proposing:

* Adding an elected official to the 11-member board that oversees the pension. Up until 2011, an elected official was part of the board, but the previous city council changed the make-up. Of the 11 members: six are chosen by the mayor with approval from City Council; four members are chosen by current employees and one member is chosen by retirees. Smitherman, whose day job is financial planning, is seeking guidance from his broker about whether he can serve on the pension board.

* Changing how the money is invested to take advantage of the market

“I do not share the general consensus that the assets are being managed properly,” Smitherman wrote in a Jan. 13 letter to current employees and retirees. “The mind set ‘everyone else experienced a downturn’ allows a pathology that mediocre investment returns are decisions that are acceptable.”

Smitherman is concerned about the overall market, but said there are natural head winds that a prudent investment adviser should be able to recognize.

“I am unconvinced that the current investment team is being preventative with their asset allocation for a short or long term down turn in the overall market,” he added in the letter. “The bottom line is I am concerned that City Council will turn over $238 million and get the same investment result.”

Smitherman has also proposed keeping more pension assets in cash form, as well as investing in securities directly instead of through hedge funds.

The proposal was shot down on Wednesday, but Smitherman said he will re-introduce the measure with some key changes.

Photo by Andreas Poike via Flickr CC License

Study: Pension Trustees Spend Less Than 5 Hours Per Quarter Evaluating Investment Decisions

Survey results recently released by Aon Hewitt reveal that most pension trustees in the UK only spend about five hours each quarter evaluating investment decisions. The survey did find, however, that trustees were spending more time on investment evaluation in 2014 than they did in 2013.

From Investment and Pensions Europe:

Pension boards and trustees are opting for fiduciary management because they can often only spend five hours each quarter scrutinising investment decisions, according to Aon Hewitt.

The consultancy said the increasing complexity of investment decisions was driving those in charge of pension assets into the arms of fiduciary managers, but that only one-quarter of those using such providers were employing indices to measure successful performance.

Drawing on the results of a UK survey of nearly 360 investors worth £269bn (€344bn), the Aon Hewitt Germany’s head of investment consulting Thorsten Köpke said the questions facing UK investors were also relevant concerns for their German counterparts.

The survey also found that 73% of pension boards and trustees were only spending five hours a quarter on investment decisions, a 10-percentage-point increase over the 2013 survey results – meaning they placed significant trust in managers to monitor investments, according to the consultancy.

However, interest in fiduciary management was largely dependant on the size of a fund’s portfolio, the survey found.

It also found that those managing more than £1bn in assets were more inclined to delegate responsibility for only part of their portfolio, while those with less than £500m in assets delegated the entire portfolio.

Köpke added: “The last few years have seen occupational schemes in Germany as in England – both small and medium-sized ones – work with fiduciary managers.”

The data came from Aon Hewitt’s Fiduciary Management Survey 2014.

Chart: Asset Allocation Over Time and the Rise of Alternatives

Check out the fascinating graphic [above] detailing the different between alternatives allocations between 2006 and 2012. In six short years, alternative investments as a percentage of pension assets have doubled.

Now, compare that to the allocation of a public pension fund in 1980 [below].

Today, no pension system in its right mind would adhere to the allocations we saw in 1980, and for good reason. Still, it’s an interesting exercise to look back at how things have changed.

Report: U.S. Public Pension Funding Up 6 Percent in 2013

Funding ratios of the largest public pension plans across the country have improved since last year to the tune of 6 percent, according to report by Wilshire Consulting released Monday morning. From Reuters:

In the study provided to Reuters, Wilshire estimated 109 state retirement systems had enough assets to cover 73 percent of their obligations in the year ended June 30, 2013, up 5.7 percent from 69 percent in 2012. Still, 90 percent of those plans were considered under funded.

Russ Walker, vice president at Wilshire Associates and an author of the report, attributed the rise to the strong rally of global stock markets over the 12 months, offsetting “weaker performance by global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2013.”

For years, many states short-changed their public pensions, putting in far less than recommended by actuaries. The 2007-2009 recession further cut revenues, while plans’ investments, which provide two-thirds of revenues, went into a downward spiral.

[…]

Pension assets totaled $428.9 billion, while liabilities were $589.7 billion, reported Wilshire, a Santa Monica, California-based independent investment consulting firm. Of the retirement systems studied by Wilshire, 34 had equity allocations that equal or exceed 70 percent, while 14 systems were below 50 percent.

As the report notes, the vast majority of plans (90 percent) are still considered underfunded despite 2013’s improvement.

Experts generally consider an 80 percent funding ratio the lower limit of a “healthy” pension plan.

Wall Street Securitizes Pension Liabilities to Create “Longevity Derivatives”

No one ever said Wall Street wasn’t creative.

Several firms are selling securities backed by longevity risk—the risk that retirees receiving benefits will live longer than expected and thus incur a higher cost on their retirement plan. More from Institutional Investor:

Sovereign wealth funds, educational endowments and ultrahigh-net-worth individuals are the target investors for longevity derivatives, which package the risk that retirees drawing annuities will outlive actuarial expectations.

The roots of this nascent market date back to 2006, when small monoline insurance companies such as U.K.-based Lucida (purchased by Legal & General in June 2013) and Paternoster (bought by Goldman Sachs Group in 2011) began taking longevity risk off European pension funds through bulk annuity buyouts.

These buyouts entail a company selling pension assets earmarked for all or some of its plan participants. The assets are converted to annuities that the sponsor can keep on its books or off-load to the insurer.

[…]

Banks build longevity derivatives products using risk models provided by firms like Newark, California–based Risk Management Solutions (RMS). They’ve closed a dozen such deals, but the customized structure can be tough for investors to grasp. Deutsche Bank is focused on creating a path into the capital markets, according to Paul Puleo, global head of pension and insurance risk markets in New York.

In December 2013, Deutsche created longevity experience options, or LEOs, a more standardized product tailored to capital markets participants. Longevity derivatives resemble the older catastrophe bond, or insurance-linked security (ILS), market, which packages insurance against natural disasters. A key difference between longevity insurance derivatives and cat bonds is that there are now a number of hedge funds dedicated to the ILS market.

Who buys these securities? It’s been mostly life insurers so far. But firms anticipate other interested parties will soon be buying up these instruments, as well. From Institutional Investor:

Although it’s been difficult for capital markets participants to compete with such natural buyers, long-term investors like sovereign wealth funds may find the portfolio diversification attractive. Ultrahigh-net-worth investors might also be interested, says Peter Nakada, Hoboken, New Jersey–based head of the life risks and capital markets units at RMS. These products can be viewed as a social good because they provide insurance for people who may not have enough cash in retirement, Nakada posits: A wealthy individual makes good money now by purchasing them; in the unlikely event that retirees exhaust their annuities, the monetary outlay can provide financial relief to the needy elderly.

The firms selling these instruments seem to realize the market is “immature” and it will take investors a while to warm up to them. But several industry sources told Institutional Investor they see longevity derivatives as a diversification tool and a good fit for portfolios of endowment funds and even high-worth individual investors.

Report Reveals World’s Largest Pension Funds

Towers Watson released its annual Global 300 report and revealed the largest pension funds in the world. Six of the 20 largest funds were public funds in the United States.

From Asia Asset Management:

With more than US$1.2 trillion in assets, Japan’s Government Pension Investment Fund (GPIF) was for the tenth-year running ranked as the world’s largest retirement savings manager in an annual Towers Watson report.

[…]

North America remained the largest region in terms of assets, accounting for 41.4% of the worldwide total. According to the consulting firm, the leading 300 players now make up 47% of pension assets globally.

Here are the 20 largest pension funds in the world, according to the report:

Screen shot 2014-09-03 at 4.09.58 PM — Source: Towers Watson

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