How Asian pensions’ growth suffers from lower alts investing

A link is emerging between pension funds' exposure to alternative investments and their asset growth, according to two recently-released studies.
How Asian pensions’ growth suffers from lower alts investing

Pension funds in Asia Pacific generally had slower asset growth than their European and US peers last year, and they also invested less in alternative assets. The two factors are related, say investment consultants.

Pension fund assets grew healthily in 2019, especially in South Korea. However, the growth of Asia Pacific pension markets was generally at a slower pace than in other regions.

While institutional pension funds in the 22 largest major markets (see note 1) saw their assets grow by 15% to $46.7 trillion in 2019, Asia Pacific’s largest seven pension markets (see note 2) saw assets expand by 11.6%, according to Thinking Ahead Institute’s Global Pension Assets Study released February 10

Jayne Bok

The lower asset growth of Asia Pacific pension funds was partly due to lower alternative asset allocations, said Jayne Bok, head of investments for Asia at Willis Towers Watson. That in turn was a consequence of many regional pension plans being dominated by government funds that are often partially funded or pay-as-you-go.

“Given the need to report back to government stakeholders, they tend to be conservative and consequently have lower risk tolerance. This translates into lowers allocations in risky assets, which would include alternatives, in their strategic asset allocation, than what you would typically see for a corporate DB [defined benefit] plan in the US or UK,” Bok told AsianInvestor.

Bok's belief was supported by the latest version of the study Beyond their Borders – Evolution of Foreign Investments by Pension Funds, which was released on January 20.

According to the study, which was commissioned by the Association of the Luxembourg Fund Industry (Alfi) and conducted by PwC, Asia Pacific pension funds allocated 8% of total AUM to alternative investments at the end of 2018. This was an increase from 7% by end-2014, according to the 2015 edition of the Alfi survey.

That compared to North American pensions, which invested 31% on average (versus 29% by end-2014), while European funds allocated 27% (versus 24%). The average global figure was 27% of total AUM by end-2018, up from 26% by end-2014.

Janet Li, Asia wealth business leader at Mercer, said Asia Pacific pensions funds have, with a few exceptions, less investment resources and dedicated investment management for alternative assets than their peers in other regions.

Janet Li

“Alternatives are less mainstream and require more time for ensuring proper investment decisions. Quite a lot of the alternative investments are illiquid in nature and some asset classes have a deep J-curve. These may not fit with some funds’ investment needs,” Li told AsianInvestor.

She added that several client segments have investment restrictions around alternative investments. These all result in a relatively lower allocation totals.

Asian asset owners also typically began investing in alternative assets slightly later than their western counterparts. As such, many are still building up their internal resources, capabilities and infrastructure to implement such allocations, Bok said.


While Asia Pacific pension funds in general haven’t grown as fast as other regions, those based in Korea were a big exception.

For the decade to 2019, South Korea’s total pension assets grew by 12.4% in US dollar terms, according to the Thinking Ahead Institute study. This compared to a global average of 4.7%. They also expanded faster than average over the past five years, growing by an average of 8.2% versus 5% across all markets.  

Australia’s pension market also outgrew the 10- and five-year global average, reporting 6.6% and 6.1% asset growth, respectively. At the other end of the scale, Japan’s pension market only expanded by 0.1% over 10 years and 4.7% over five years.

Notably, pension funds in South Korea and Australia also invested more aggressively in alternative assets than their peers in countries like Japan.

For instance, Australian pensions’ alternatives allocation stood at 22% at the end of 2019, according to the Thinking Ahead Institute study. Meanwhile the Alfi study noted that superannuation funds had invested 18% of their assets in alternatives in 2018, up from 16% in 2014. With Australia’s superannuation savings set to keep growing, smaller funds are also likely to invest more in alternatives. 

“In Asia Pacific, Australia has been leading the way and has been very early to invest into alternatives relative to other peers in Asia. In addition, the allocation has continued to increase, and the number of alternatives asset classes have continued to expand,” Li said.

In South Korea, the National Pension Service (NPS) made up for more than 90% of the Korean pension market by end-2018, according to the Alfi study. Its grew its alternatives portfolio to W81.9 trillion ($69.5 billion) at the end of November 2019, or 11.3% of its total AUM of W723.9 trillion. That compared to just 4% in 2008.

"Other smaller Korean pension funds are said to be allocating more than 30% to this asset class,” the Alfi study stated.


In sharp contrast, Japanese pension funds have, on average, only allocated 11% of assets to alternatives, Bok said. However, the country's funds are becoming more willing to invest.

“Australia has been fairly stable in terms of its percentage allocation to alternatives over the last decade, whereas Japan has shown significant growth, increasing from 4% to 11% over the same period,” she elaborated.

One example is the Government Pension Investment Fund (GPIF), the largest pension fund in the world with ¥169 trillion ($1.54 trillion) of total assets by end-2019. It has slowly raised its alternatives investments from minimal levels a few years ago to ¥828 billion at the end of 2019, or 0.49% of total assets. As part of this process it started awarding mandates to boost its exposure and hired consultants to manage foreign alternatives investments.

The pension giant has plenty of capacity too; it is allowed to invest up to 5% of its total portfolio in alternative assets.  

Over 50% of Japanese pension funds allocated some of their assets in alternatives in 2018, compared to only 12.8% in 2014, according to the Alfi survey. According to a JP Morgan survey among Japanese corporate pension funds, 39.7% of respondents plan to allocate more to alternatives in the coming years.

Note 1: The 22 largest pension markets included in the study which are: Australia, Brazil, Canada, Chile, China, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Malaysia, Mexico, Netherlands, South Africa, South Korea, Spain, Switzerland, the UK and the US.

Note 2: Asia Pacific is home to seven of the 22 major pension markets in the survey. The list includes: Japan Australia, South Korea, Malaysia, (Mainland) China, Hong Kong and India.

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