Asian pension funds see steady increase in risky assets while playing catchup with the West

Asian pension funds need to work twice as hard, especially in governance for investment oversight, to keep pushing for greater portfolio diversification and resilience in order to fulfil their fiduciary duty to an ageing population.
Asian pension funds see steady increase in risky assets while playing catchup with the West

Asian pension funds’ allocation to risky assets, including equities and alternatives, have seen a steady increase in 2021 as they try to adapt to a more sophisticated investment approach and achieve greater diversification, a recent survey showed.

However, compared to their counterparts in Europe and North America, they still have a long way to go before reaching similar levels, according to latest data from the global top 300 pension funds study of WTW’s Thinking Ahead Institute released on Tuesday (Sep 6).

The study showed that the top pension funds by asset size across Asia Pacific (APAC) — led by Japan’s Government Pension Investment (GPIF) and Korea’s National Pension Service (NPS) — increased their allocation to equities to 48.8% in 2021, up from 43.3% in 2020. Similarly, alternative and cash allocation went up from 3.4% to 5.7% in 2021.

World's top 20 pension funds' weighted average asset allocation in 2021 excluding Latin American and African funds (Source: Thinking Ahead Institute)

The study looked at the world’s top 300 pension funds by asset size, through their public disclosure. The asset allocation data for China’s National Social Security Fund and Singapore’s Central Provident Fund was not available.

All pension funds included, Asian pension funds' exposure increased incrementally to 49.8% in equities, and 8.7% in alternatives and other - alternatives were a major component of the segment.

World's top 300 pension funds' weighted average asset allocation in 2021 
(Source: Thinking Ahead Institute)

The situation was a combination of APAC funds allocating more to these asset classes, as well as strong investment returns from them over the period, the study noted.

The trend is in line with general allocation movement among asset owners across the region. According to AsianInvestor’s latest Asset Owner Insights survey, asset owners’ equity exposure went up from 16% by the end of September 2021 to 28% as of end March.

In the private market, asset owners’ allocation increased to 21.5% from 15.3% over the same period, driven by more input in real assets and private debt.

World's top 20 pension funds by asset size in US$ million in 2021
(Source: Thinking Ahead Institute)

However, Asian pension funds still look much more conservative compared to those in the West.

Among the world's top 20 pension funds, those from North America invested 56.1% of their assets in equities, and 27.8% in alternatives and cash, with only 16.1% in bonds in 2021 — much less than the 45.5% in bonds of the Asian pensions.

European pension funds were also better at taking more risks. They allocated 59.2% of assets in equities, 10.9% in alternatives and cash, and just 29.8% in bonds.


Jayne Bok, WTW

Pension industry experts believe the difference in risky assets between Asia and the West results from the shorter history and less sophisticated expertise of Asian pension funds, and the fact that many pension funds in Western markets are corporate pension schemes, while those in Asia are mostly state-run.

This means that the target return for many of these funds has traditionally been lower, and this is reflected in the asset allocation, noted Jayne Bok, WTW’s head of investments, Asia.

There are also investment policy restrictions for large Asian pension funds in holding risky assets, added with domestic bias, while the supply of both alternative assets and managers in Asia is still limited, said Janet Li, Asia wealth business leader at Mercer.

“The main lesson that can be learned is that moving the allocation of a rapidly growing fund means you have to work doubly hard to get in front of it, and a cautious or incremental approach will probably not get you there fast enough,” said WTW’s Bok.

“Reducing home bias through regional diversification aside, I do believe that Asia’s funds have benefited from their forays into alternative asset classes,” she told AsianInvestor.

In an environment where stocks and bonds are dropping at the same time, illiquid asset classes can provide the diversification and buffer needed to ride through the challenging environment.

“Some of them know it and have been pushing hard to increase the weight of alternatives in their portfolio, such as Korea’s NPS,” noted Diego Lopez, managing director of Global SWF.

“There are no shortcuts, and there is a need to continue on a disciplined path towards greater diversification, but current market conditions weakening currencies and political agendas get in the way,” WTW’s Bok noted.

“My advice would be to just keep pushing towards greater portfolio diversification and resilience, as that will take them much further in terms of achieving the mission of retirement security for millions in Asia,” she added.


Janet Li, Mercer

On the process of portfolio diversification, Mercer’s Li thinks a key element that Asian pension funds need to learn from their western peers is a more effective governance on accountability, and a strong sense of fiduciary duty to the beneficiaries.

“I'm not saying that it doesn't exist in Asia, but there's more regulation and a higher sense of responsibility around ensuring that the right expertise is deployed in making investment decisions for the fund,” Li told AsianInvestor.

While many European pensions have developed their internal senior delegation on accountability, those in Asia are more reliant on external investment consultancy, she noted.

“By having stronger governance and a clearer division of responsibilities, and with the appropriate expertise, that would help improve the outcome,” Li said.

Although investment return is a complex issue, at least the process is more structured, with clear documentation on investment decisions, she said.

“I don't think it is about the asset allocation itself. Allocation is just an outcome. It doesn't explain everything. Because all the pension funds, they have their own investment objectives and they shouldn't be copying the others because they don't know what the liability nature of the other fund is,” she said.

She said Mercer has seen various behaviours of pension investors during the pandemic. Those who have a good governance framework and decision-making process on agenda such as asset allocation thresholds, boundaries, tactical allocation, and accountability, had a smoother ride during the crisis.

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