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20 January 2020

ALFI: Pension funds beyond their borders

Low interest rate environments in many developed nations, alongside increasingly volatile equity markets, are leading pension funds to adapt their investment strategies. In their search for yield, many are looking outside their borders as well as investing in alternatives, according to a new report by the Association of the Luxembourg Fund Industry (ALFI) produced by PwC Luxembourg.

The report, which examines the growth of pension-fund assets, their foreign-investment limits, and other key trends, shows that pension-fund assets globally are expected to grow at a 5.4% Compound Annual Growth Rate (CAGR) between 2018 and 2025, rising from USD 42.2 trillion to USD 61.1 trillion. Latin American pension funds are expected to see the strongest CAGR with assets soaring by over 12% to reach USD 2.4 trillion.

In terms of asset allocation, equity continues to hold the crown, accounting for 38% of total pension assets at the end of 2018. However growth, in percentage terms, has turned negative – with allocation falling from 60% in 1998. Alternatives are expected to play an increasingly important role in pension funds’ portfolios as they continue to search for yield. In absolute terms, pension fund alternatives AuM has risen from USD 9.2 trillion in 2014 to USD 11.6 trillion at the end of 2018.

Globally, regulations governing pension fund foreign exposure continue to differ drastically. While the majority of countries examined do not set any limits regarding foreign investments, some have set limits for non-OECD or non-EEA countries. Additionally, others have set limits for specific asset classes. Overall, however, there has been an increase in pension funds’ foreign exposure since 2014, rising from 31% to 34% at the end of 2018.

Key findings of the report include:

  • On a regional basis, North American pension funds still account for the majority of AuM, holding 61% of global pension assets at the end of 2018.
  • Alternatives were a large driver of growth across the globe for pension funds. Latin America saw the strongest growth in this space, albeit from a low base, with private equity investments contributing to the double-digit growth.
  • Globally, the average foreign investment of pension funds for considered countries stands at 34% of their assets, however regionally the differences are stark.
  • Pension funds look to align their investments with Sustainable Development Goals (SDGs) and Environmental, Social & Governance (ESG) factors, with EU pension funds leading the pack.

Full press release on ALFI

Full publication on ALFI

© ALFI - Association of the Luxembourg Fund Industry

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