Fund flows, rising salaries and changing demographics are driving the accumulation of wealth and retirement savings in Asia Pacific which is in turn reflected in fast pension fund asset growth in the region.

This is according to a report released Monday (September 6) by Willis Tower Watson’s Thinking Ahead Institute and Pensions & Investments.

Asia-Pacific funds saw an annualised growth in assets under management (AUM) of 9.9% over the past five years, compared with 7.8% growth for European funds and 7% growth for North American funds.

Jayne Bok

Jayne Bok, head of investments Asia for Willis Tower Watson, said the changing wealth landscape in Southeast Asia was behind the growth.

“[This] is in turn driven by fund flows, rising salaries and, to some extent, younger demographics. Whilst Asia Pacific is also aging, we are not as far advanced as Europe and the US on this front,” she told AsianInvestor.

FIXED INCOME TILT

The report, which ranks the world’s 300 largest pension funds by AUM and looks at trends in their portfolio allocation, also found a preference for fixed income among large Asia Pacific pension funds.

This suggests they are falling behind their European and North American counterparts in moving towards equities and alternatives, even as they eye diversification in search of yield.

Asia-Pacific pension funds in the top 20 list had 53.2% of their assets invested in fixed income in 2020. Meanwhile, European and North America funds in the top 20 allocated just 31.7% and 18.6% to fixed income.

European and North American funds have instead favoured equities, allocating 53.6% and 44.4% of their portfolios to this asset class, respectively. Asian institutions in the ranking allocated 43.3% to public equities, and 3.4% to alternatives and cash.

Asset allocation of top 20 funds, by region. Source: Thinking Ahead Institute and Pensions & Investments

“The study shows that Asia is generally more conservative to begin with in terms of its asset allocation,” said Bok. “It’s worth noting that interest rates in Asia Pacific have a different absolute starting point than North America and Europe, although again, I’d caution this differs by market,” she added.

LOW RATES

Central bank-set interest rates in North America and Europe are among the lowest in the world.

As of September 2021, the policy rate for US and Canada is 0.25%, while the UK has an interest rate of 0.10%. Norway and Sweden have interest rates of 0.0%. Taiwan has a policy rate of 1.125% and China of 3.85%. Japan is an outlier in the region, with a policy rate of -0.10%.

Underlying liabilities and overall investment objectives have largely determined Asia Pacific pension funds’ asset allocation decisions, explained Bok. These may also be different than those for North American or European pension funds.

The list of top 20 largest pension funds according to the report include sid Asia Pacific institutions, namely: Government Pension Fund (Japan), National Pension (South Korea), National Social Security (China), Central Provident Fund (Singapore), Employees Provident Fund (Malaysia) and Local Government Officials (Japan). The combined assets of these funds grew by 13.9% in 2020.