A report from TheCityUK estimates that global pension assets enjoyed their third successive year of recovery in 2011 rising by 3% to US$30.9 trillion. The increase follows an upturn of 10% in 2009 and 11% in 2010. TheCityUK’s Pension Markets report notes that the UK, with pension assets totalling US$3 trillion (or 91% of GDP), remains the second largest market in the world accounting for 10% of total assets. UK assets are only exceeded by the US market where assets of US$17.4 trillion make up more than half (58%) of the global total.
Chris Cummings, chief executive officer (CEO) of TheCityUK, said: “Despite the sharp drop in 2008, global pension assets have nearly doubled over the last decade. However, while assets are up, liabilities have continued to escalate, related in part to increasing life expectancy in major developed economies. The value of assets relative to liabilities was 17% less in 2011 than in 2007. The size of liabilities poses a major challenge to the funding of defined benefit [DB] pensions in the UK and across the globe.”
TheCityUK’s report identifies four challenges facing pension funds worldwide:
- Accounting and regulatory changes, such as the implementation of IAS19, which will eliminate the option of smoothing and therefore increase volatility in sponsoring companies’ financial statements.
- Greater emphasis on risk reduction in asset allocation of pension funds in order to constrain volatility and keep funding ratios stable.
- Transfer of risk to a third party through the use of insurance buyouts or mitigation of risk through greater use of derivatives for hedging purposes.
- Acceleration of trend from DB to defined contribution (DC) schemes.
Cummings added: “Risk reduction is the key trend in the UK. Many DB schemes have been closed to new members with numbers dropping by three-quarters, from 4.1 million in 2000 to 1 million in 2010. Other means of mitigating risk include allocation to bonds, up from 20% to 34% over the last decade, while lowering allocation to equities, down from 71% to 50% over the same period. Likewise, some companies are transferring responsibility for DB pension schemes to insurance companies – the buyout market was worth between £7bn and £8bn a year between 2008 and 2010, although this dropped to £1.3bn in the first half of 2011.
“The switch from DB to DC schemes is particularly marked in the UK. DC schemes have a crucial role in future financing of pensions with the contributions from FTSE 100 constituent companies to DC schemes rising to £4bn in 2010 from £1bn in 2005. TheCityUK is currently reviewing the ability of the DC market to deliver cost effective and accessible pensions in the UK.”
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