Asian pension funds have grown their share of assets under management in global markets and particularly equities as they attempt to raise returns to keep up with fast-aging populations, according to an analysis from global consulting firm Mercer.

The company's research focused on asset allocation trends from pension schemes across Latin America, the Middle East, Africa and Asia. It noted that the surge in Asian institutional capital in main global markets has helped drive up the appetite for equities instead of fixed income. The low-return environment in fixed income is not meeting the return requirements in countries with an expected pressure on pension funds and their financial longevity.

As populations are expected to decline within this century, pensioners are expected to outnumber workers in countries like Korea, Japan, Taiwan and Hong Kong. This widespread demographic challenge is pushing pension funds in each country to generate higher returns.

Among the pension schemes involved in the analysis, average allocations were 46% to fixed income, 40% to equities, 4% to alternatives and 10% to cash/other. This positioning represents an increase in equity of 32% and a decline in fixed income of 57% over the measurement period from 2013 up until 2018.

Significant home biases in terms of preferences for domestic investments remain, but Mercer expects continuous pension funds regulation to liberalise and support broader global investment strategies. This diversification will also help solve the issue of risk of overexposure to domestic markets.

Janet Li, wealth business leader for Asia at Mercer, believes Asia-based pension funds will only increase their share of global assets under management (AUM) in the years to come, relative to their North American and Western European peers.

Janet Li

“Considering the pension space, it would have a linkage with the speed of aging in the countries and also the longevity. From this perspective, Asia in general may still experience more growth than the developed markets,” Li said.

In addition to more equity investment, the Mercer survey also noted an increase in foreign over domestic assets. As a portion of equity portfolios, average foreign exposure increased from 45% to 49%, with even-more-pronounced movements in fixed income, where foreign exposure moved from 16% to 23%.

This shift was notable in Japan, South Korea, Malaysia and Taiwan as investors sought greater geographic diversification into overseas markets.

Of all countries surveyed, Hong Kong has the highest exposure to equities with 66%, driven by the Mandatory Provident Fund’s scheme elections to lifestyle and standalone equity funds. At the other end of the scale, Indonesia has the smallest equity exposure with 8%.

The Mercer report focuses on allocation and investment trends for nearly $5 trillion in AUM in government, corporate, and mandatory pension schemes across Latin America, the Middle East, Africa, and Asia. Schemes rom Japan, South Korea, Hong Kong, Taiwan, Malaysia, Indonesia and Thailand were the Asian component.


The increase in equity allocation does present the challenge of fluctuating stock markets. Two of Asia’s, and the world’s, largest pension funds, Japan’s Government Pension Investment Fund and South Korea’s National Pension Service, both saw a dip in returns due to the poor performance of equities markets in late 2018.

According to the Mercer analysis, all Japan and Korea pension funds included in the analysis posted material increases in their equity portfolios as they sought to increase expected returns. Li pointed out that from a market risk perspective, more equities at the expense of fixed income would increase the volatility of the portfolio, especially in the short-term.

“Nevertheless, when we assess “risk” of pension funds, market risk is just one way to look at it. We have to note the ultimate objectives of the individual pension funds,” Li said.

She noted that as people are living longer, pension funds will be required to chase higher growth, and this might only increase risk.


Pension funds are also seeking to diversify away from developed country government bonds as interest rates are expected to stay low.

Li mentioned that diversified fixed income strategies gaining traction in pension fund portfolios, with an increased interest in municipal bonds, corporate bonds and/or emerging markets government bonds. However, alternative assets such as commercial real estate have had even further appeal.

“We have seen a clear trend of pension funds moving into alternatives and we have seen the space being more crowded, especially in the private equity space. Thus, funds would need to keep an open mind and open eye on how the expected return and opportunities are changing within certain asset classes,” she said.

In general, pension funds have been adding alternatives to their portfolios as a diversification strategy. Li mentioned that the asset allocation of the portfolio should be considered “holistically” and not necessarily just between equities and alternatives.

“For instance in the late cycle, we have also seen clients deploying a more diverse fixed income strategy to keep expected growth on the portfolio.”

Asian pension funds also still have more room to increase their exposure to alternatives, given that most Asian investors (Korean pension funds being the big exception) have relatively low allocations to the asset classes. Li listed the main reason being the lack of relevant experience and in some cases the investment restrictions, such as cap or limits of share of overall AUM of the portfolios.