U.S. Pensions Show Greatest Home Bias in Equities

Home-country bias in equity holdings has declined among pension plans globally.

There is a clear sign of reduced home bias in equities, as the weight of domestic equities in pension portfolios fell, on average, from 65% in 1998 to 43% in 2014, according to Towers Watson’s Global Pensions Asset Study 2015.

However, during the past 10 years, U.S. pension plans have maintained the highest bias to domestic equities (67% in 2014), having also increased domestic equity bias during the past three years. Canadian and Swiss funds remain the markets with the lowest allocation to domestic equities (33% and 34%, respectively, in 2014), while U.K. exposure to domestic equities has more than halved, to 36%, since 1998.

The research shows Canadian and U.S. funds have retained a very strong home bias in fixed-income investment since the research began (98% and 91%, respectively, in 2014), while Australian and Swiss funds have reduced exposure to domestic bonds significantly since 1998—down by 31% and 17%, respectively, during this period.

Allocations to alternative assets (especially real estate and, to a lesser extent, hedge funds, private equity and commodities) in the larger markets have grown from 5% to 25% since 1995, according to the research. In the past decade, most countries have increased their exposure to alternative assets, with Australia increasing them the most (from 10% to 26%), followed by the U.S. (from 16% to 29%), Switzerland (from 16% to 28%), Canada (from 13% to 22%) and the U.K. (from 7% to 15%).

Assets at U.S. institutional pension funds increased 9% in 2014, to a record $22.1 trillion, according to Towers Watson. Globally, institutional pension fund assets in the 16 major markets grew by more than 6% during 2014 (compared to around 10% in 2013) to reach a new high of $36 trillion.

DC Overtaking DB

The Towers Watson study also shows that defined contribution (DC) assets grew rapidly for the 10-year period ending in 2014, with a compound annual growth rate (CAGR) of 7%, versus a rate of more than 4% for defined benefit (DB) assets. As a result, DC plan assets have grown from 38% of all global pension assets in 2004 to 47% in 2014 and are expected to overtake DB assets in the next few years. In the U.S. specifically, DC assets continued to climb steadily and now represent 58% of all assets, up from 52% in 2004 and 55% in 2009.

Australia has the highest proportion of DC to DB pension assets, at 85% to 15%, followed by the U.S., at 58% to 42%. Only Australia and the U.S. have a larger proportion of DC assets than DB assets. Japan, Canada and the Netherlands are markets dominated by DB pensions, with 97%, 96% and 95% of assets, respectively, invested in these types of pensions.

According to the study, pension assets now amount to around 84% of the global gross domestic product (GDP), substantially higher than the 54% recorded in 2008. In the U.S., the ratio of pension assets to GDP increased from 95% in 2004 to 127% in 2014.

“While there has been a significant improvement in various pension balance sheets around the world since the financial crisis, many DB pension funds are still in very weak funded positions. However, in the U.S., pension plans are in a better position, given the contribution flexibility,” says Steve Carlson, head of Towers Watson’s Americas Investment practice.

The 16 largest pension markets included in the study are Australia, Brazil, Canada, France, Germany, Hong Kong, Ireland, Japan, Malaysia, Mexico, the Netherlands, South Africa, South Korea, Switzerland, the U.K. and the U.S. The P16 accounts for approximately 85% of global pension assets.

The Towers Watson Global Pensions Asset Study 2015 can be found here.