US Remains Biggest Force in Pension Realm, per Study

WTW’s Thinking Ahead Institute found that international unrest and an uncertain worldwide economic outlook hinder an otherwise growing global retirement effort.

The U.S. continues to dominate the world’s pension system, according to a study by the Thinking Ahead Institute, a research organization sponsored by financial services giant WTW.

As of year-end 2023, U.S. pension assets (both defined benefit and defined contribution) made up 63.9% of the globe’s 22 highest-value pension-providing nations, up from 56.5% 10 years before, the study indicated. That may have something to do with the large amount U.S. pension providers allocate to equities—42%—over a span when stocks did well.

Among the top seven nations’ pension markets, which the report dubs the P7, only Australia, with just 6% of the U.S.’s pension assets, has a bigger allocation to stocks at 51%.

The P7 (the U.S., U.K., Australia, Canada, Japan, the Netherlands and Switzerland), possessed almost $57 trillion in estimated assets as of year-end 2023, about 90% of the global total. This concentration of assets can be seen in another way: The 300 largest pension funds (mainly in the P7) constitute 41% of total global pension assets, the report calculated.

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In growth terms, the P7 nations have logged increases close to those found elsewhere. Over 10 years, the P7 pension assets grew at a 4.5% annual rate (market returns plus contributions minus benefit payouts), identical to that of all nations. Regardless of the time, from one year to 20 years, rates were very similar. The difference was that the P7 had a much larger asset base.

Among the trends the report highlighted was a possible slowdown of the switch to defined contribution from defined benefit plans. As the study put it, “there is a growing sentiment that this shift may be going too far, with concerns about the adequacy of retirement income and the loss of financial security among retirees.”

In the U.S., the study noted, IBM last year reopened its DB plan, helped by excess money in its over-funded DB plan. The IBM move, per the report, “reflects a recognition of the limitations of DC plans in delivering secure and predictable retirement income.”

The study also found an increasing influence of governments on the pension system. In Britain, for instance, the government seeks to “attract more cash into domestic investment and divert pension savings into higher risk, higher growth U.K. companies.” Under the so-called Mansion House reforms, U.K. plans are being encouraged to allocate more investments to private equity, for example.

There is little question that the U.S. should continue its top-dog  status. The study pointed out that the  U.S., for instance, is the world leader in artificial intelligence, and AI is where many of the next financial advances should occur.

Certainly, pensions worldwide face a host of problems, namely international turmoil and possible economic weakness. The report refers to these problems as “systemic risk,” citing: “geopolitical confrontation, climate change, biodiversity loss, inequality and social division and financial system plumbing.” As a result, the study added, “the investment industry is scrambling to develop robust models to measure and adapt to systemic risk.”


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Japan’s GPIF: Active Engagement Spurs Sustainable Market Growth

The pension giant studied its nearly 27,000 engagements with its portfolio companies and found the fund’s influence boosted the firms’ valuations.



Does a big pension fund improve a portfolio company’s value, due to the fund’s guidance? In Japan, it looks like it has. A large study conducted by Japan’s $1.53 trillion Government Pension Investment Fund found that engagement with its portfolio companies by its asset managers “contribute[s] to the sustainable growth of the market.”
 

The pension giant stated that it encourages its equity investment managers to actively engage in constructive dialogues “that contribute to the long-term enhancement of corporate value.” 

The study used the records of 26,792 engagements (advice giving) and 48,077 themes (policies the fund pushed, such as adjusting to climate change) conducted by 21 of the pension fund’s domestic equity investment managers from fiscal 2017 through 2022.   

“There have been no previous studies that comprehensively analyzed such a large number of funds and dialogues, which could be the first attempt in the world,” the GPIF stated.  

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The study also evaluated the effectiveness of the engagements by applying a method called the “Difference in Differences Method” to statistically estimate the positive changes that GPIF, through engaging with portfolio companies, had produced. According to the pension fund, the DID Method identifies and compares the differences between the “pretreatment and post-treatment status of an intervention group and a control group.” The intervention group in the study included companies with which the fund was engaged, while the control group consisted of companies with which it was not. 

Per the GPIF’s report on the study, “it became clear” that engaged portfolio companies saw corporate value-related indicators, such as market cap and price-to-book ratio, and non-financial key performance indicators, such as reduced greenhouse gas emissions and increased diversity, improve more than non-engaged portfolio companies.  

According to the report’s analysis, dialogues on climate change increased decarbonization targets and decreased carbon intensity scope among companies with which it engaged. Furthermore, the report found that dialogue concerning board structure led to an increase in the number of independent outside directors, along with improvements in investment return indicators such as market cap and total shareholder return.   

The report also stated that engagements related to board structure and self-evaluation indicated that the market capitalization of the engaged companies increased by an average of 6% compared with the non-engaged companies.   

“This Evaluation project has demonstrated the significant value of the engagements conducted by the asset managers to date,” the pension fund stated. “We will continue to strive, together with the asset managers, to achieve more effective engagement activities in the future.” 


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