Global pension schemes performance and outlook

By Matt Fletcher, EPRA Director of European Investor Outreach

EPRA investor outreach analyses the performance of global pension schemes each year from the varied sources of data made available to us. We track asset allocation, performance, assets under management and key trends within the asset owner investment space over time to represent our sector to investors with information the schemes require for effective decision-making. Please note that all the information and analysis used in this report is until December 2019, and therefore predates the recent pandemic.
Size matters
At the highest level, major global pension schemes had a total of USD 47 trillion assets under management in 2019. It is difficult, however, to draw significant insights from such a large and diverse pool. If we look more closely at the performance of Top 300 pension schemes by assets under management and over the last five years (up to 2019), this gives more valuable insight into the factors that will shape this source of capital flows to our sector in the coming five to ten years. We will also consider the Top 20 pension schemes in isolation.
In 2019, the Top 300 pension schemes held over USD 19 trillion in assets under management, which was 42% of the total pension scheme universe. These 300 schemes had recorded an annualised 5% return over the previous five years (since 2014) and an 8% return in the year to 2019.
The Top 20 pension schemes had a minimum entry level of USD 140 billion and achieved a significantly higher annualised return over the previous five years than the Top 300 at 5.5%. Indeed, their 2019 return was also slightly higher at 8.1%. It appears there may be a size advantage for pension schemes when it comes to underlying investment performance. To demonstrate this, we can look at the respective five-year compound annual growth rates across the Top 300 pension schemes:
The advantages afforded to schemes with higher assets under management are broadly characterised by scale:

  • larger spend on internal infrastructure and external research

  • stronger governance

  • better access to a wider pool of investment products and

  • lower investment costs.

Belief in the advantages of scale are shaping the global pension scheme market, and more recently we have seen increased adoption of the sovereign fund model, either as a national pension scheme or a national wealth fund. We also see continued consolidation in the pension scheme market to take advantage of scale. It is no surprise to see the UK local government pension schemes consolidating into seven discrete Superfunds broadly following the example of the early adopter nations of Sweden, Denmark and the Netherlands.
Where is the money?
A review of the Top 300 pension schemes total fund assets split by fund domicile demonstrates the continued dominance of North America throughout the five-year period:
How is it allocated?
When we look at the Top 20 pension schemes regionally, and by weighted average allocation, it is interesting to note that although North American and European funds have predominantly invested in equities; Asia-Pacific funds have conversely largely allocated to bonds. There is also a significant difference in the regional allocation to alternatives.
What has happened recently?
What also appears from analysis and discussions with schemes is that risk budgets are being stretched to achieve return targets and future goals. Consequently, risk is also being diversified across more, and increasingly complex, investment products. Diversification within the investment strategy was noted as key for future success by more than 50% of Top 20 schemes.
A significant shift towards allocations to real assets in recent years is a significant development and an important opportunity for the European listed real estate sector. The shift is driven by a search for alternative sources of income to ensure scheme participant payments, given lower expected income from government bonds and fixed income for many years to come. The recent pandemic appears likely to prolong the low-interest-rate environment.
What else do we need to know?
Looking at major themes and developments for schemes over the next five to ten years, they highlight an increasing prevalence of defined contribution schemes and further regulation within the pension scheme market as the hot topics. The increasing use of defined contribution schemes is expected to directly benefit the European listed real estate sector. As the fiduciary responsibility for investment passes to the participant, the pension product is required to be liquid, have regular pricing and be portable.
Also high on the agenda for schemes going forward is their interest in allocating sustainably and responsibly, noting their own need for improved engagement and better stewardship of their investments alongside the need for better information from their investments. Scheme participants are requesting responsible investments and looking for proof within reporting. European listed real estate companies that demonstrate a sustainable approach will be rewarded.
In many ways, pension schemes reflect the changes in society at large. The pensions industry has reached a defining moment in its wider purpose, and 2020 signals the start of a decade where sustainability will grow in importance alongside underlying investment returns. We can expect to see significant reallocations of capital, particularly reflecting climate change themes, and a switch towards purposeful capitalism where the asset owners will consider fiduciary responsibility as a method of creating positive change in society.
Sources: Willis Towers Watson, P&I 1000, Preqin and EPRA