Global pension assets rose 12% year-on-year to hit a record $26.5 trillion in 2010, with Brazil growing fastest in the past decade relative to weightings followed by Australia, finds a Towers Watson study.

Last year saw pension assets increase in 11 of the 13 major markets covered by the study, with Ireland and France the outliers. In terms of total assets, Australia has overtaken Canada to stand fourth in this list at $1.26 trillion, behind the US ($15.26 trillion), Japan ($3.47 trillion) and the UK ($2.28 trillion).

Such global growth is the continuation of a trend that saw assets surge 17% in 2009, following a 21% slump in 2008 which represented a regression to 2006 levels.

Total pension assets in Hong Kong, meanwhile, rose from 18% of GDP in 2000 to 38% in 2010, making it one of the most improved pensions markets in the last 10 years. According to the study, pension assets-to-GDP ratio grew the most in Australia (33%), followed by South Africa (21%).

Interestingly, over the past 15 years pension allocations have only increased to “the others” category – including real estate, private equity and hedge funds – rising 14 percentage points (pp) to 19% by 2010. In contrast, they dropped 2pp to 47% for equities, 7pp to 33% for bonds, and 5pp to 1% for cash.

Bond allocations, however, have grown by nine percentage points since 2005 – the highest level of any of the asset strategies over this period.

While welcoming recovery of the markets since the global crisis, Naomi Denning, Asia-Pacific head of investment at Towers Watson, believes ongoing aftershocks are a reminder that the economic recovery remains tenuous.

“While nervousness about the volatility of markets and extreme events is just below the surface, there is broad acceptance that this is the new normal and that investors will need investment strategies that are more flexible and adaptable than they have been in the past,” she says.

The UK still has the highest allocation to equities at around 55%, followed by the US and Australia. Japan and the Netherlands, meanwhile, are the markets with higher-than-average exposure to bonds.

In Australia, the past five years have seen pension fund allocations to cash and the others category increase by seven and five percentage points to 25% and 12%, respectively. This represents the highest and second highest levels across the seven major nations (Australia, Canada, Japan, Netherlands, Switzerland, UK and US).

Australia’s exposure to equities and bonds has dropped by seven and five percentage points to 49% and 14%, respectively, over the same period.

But across the big seven markets there was a clear sign of reduced home bias in equities, with the weight of domestic equity in pension asset portfolios having fallen in almost all cases.

The US market remains most dependent on domestic equities, with around 70% of total equities invested in its own market, down from 80% more than a decade ago.

Yet when it comes to fixed income, most of the investment is in domestic bonds, with very little exposure to foreign bonds (the need for liability hedging limits the use of foreign bonds).

On a separate note, the past decade has seen a trend towards the establishment of defined contribution (DC) pension schemes, which now represent 44% of total assets. Defined benefits (DB), nevertheless, still make up the majority.

Hong Kong has the highest proportion of DC to DB assets (85% in 2010), despite being the smallest of the 13 markets in terms of asset size at $87 billion.

On average, Hong Kong retirement schemes invested over 60% of assets in equities, which was also the largest allocation to risky assets of any pension market in the study.

“Given the growing importance of DC schemes, in particular Mandatory Provident Fund schemes in Hong Kong, both employers and employees need to face up to certain DC investment challenges,” says Philip Tso, head of investment for Hong Kong at Towers Watson.

He notes that improving DC design and investment are increasingly becoming a focus for both fiduciaries and members.

In the ranking of markets with more DC assets relative to DB, Australia comes first with 81% in 2010, followed by Switzerland (60%) and the US (57%). Japan and Canada, meanwhile, are close to 100% DB.

“Just as we have seen in the DB world, improving clarity and responsibility will lead to more effective governance of DC schemes and a real opportunity to improve the investment outcomes for millions of individuals,” adds Denning.