Growth assets of pension funds and retirement adequacy and sustainability

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ACFS has just released the first report of this series on Asset Allocation of Pension Funds, based on MMGPI data provided by Mercer. This is the second report of the series. In this report, we examine if the level of assets allocated to growth assets by pension funds of a pension system has any association with its adequacy and sustainability.

 

Report highlights

  • Pension funds around the world follow different strategies in asset allocations. In pension systems that adopt a pure liability-driven approach, the level of assets allocated to growth assets is limited. In other pension systems, pension funds invest more in growth assets to provide for retirement income.
  • In terms of adequacy of pension systems, countries with very high allocation of pension assets to growth asset classes do not have high net replacement rate, a key indicator of retirement adequacy. Countries with moderate allocation to growth assets actually are those with top net replacement rate.
  • In terms of sustainability of pension systems, there is a positive relationship between the level of growth assets and the overall size of pension assets. Specifically, large pension markets, as measured by pension assets to GDP ratio, tend to have high allocation to growth assets in pension portfolios. It was also observed that pension systems with higher allocation to growth assets earn higher investment rates of return.
  • Putting adequacy and sustainability together, we find that top performers in both adequacy and sustainability are those large pension markets with moderate to high allocation to growth assets in pension funds. Countries with very aggressive allocation of pension assets to growth assets do not actually belong to this group. Our observation suggests that the moderate to high level of growth assets held by pension funds could potentially enhance pension system’s adequacy and sustainability.

To view the full report, please click here: Growth assets of pension funds and retirement adequacy and sustainability

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