A promising year for pension funds

As coverage in emerging economies grows, pension funds across the world are embracing innovation in order to adapt to economic challenges


If 2014 was a big year for pension funds, 2015 looks set to be even bigger. As countries across the globe continue to recover from the financial crisis, funds across nations at all stages of development are capitalising on new opportunities and increased coverage. Emerging economies are improving their pension systems with wide-reaching reforms and game-changing liberalisation, while new regulations across a number of countries in the EU are helping pension fund managers to optimise and stabilise their long-term returns.

Pension funds remain the biggest institutional investors in a number of countries across the world, and that looks set to continue as their capital is boosted yet further through various key factors. Last year the UK experienced its biggest annual fall in unemployment in more than 40 years, according to data by the ONS, while the US saw its highest level of job creation since 1999 – meaning both could see record levels of employees contributing to pension schemes in 2015 and beyond.

The favourable prospects are also evident on a wider scale; according to the Mercer Global Pension Index 2014, schemes have improved globally, and Professor Deborah Ralston, Executive Director of the ACFS, is confident this is a sign of things to come. “It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect”, she said in a statement.

According to the report, the number of people between the ages of 55 and 64 still in employment has risen across the majority of countries surveyed, indicating another promising development for pension funds. And they’re likely to be further bolstered when the pension age rises over the coming years – a trend set to take off across a number of key markets in the near future.

Brimming with opportunity
The situation is particularly exciting in emerging economies, where GDP growth is set to hit 4.8 percent this year (up from 4.4 percent in 2014), and 5.4 percent by 2017, according to the World Bank. India, China and other oil-importing countries are expected to receive a boost from lower oil prices, and pension funds in the region will likely reap the benefits.

In wider Asia, pension systems have been going from strength to strength; Singapore ranked in the top 10 of the Pensions Index for the first time ever in 2013, benefiting from relatively high levels of coverage, and it has maintained its place in the top 10. “Pension systems in many Asian countries are in an embryonic phase and we expect them to gradually strengthen in coming years”, said David Knox, Senior Partner at global consulting firm Mercer.

Pension funds are also growing rapidly across a number of African nations. Increased stability in the political sphere and rapid economic growth are leading to a rising number of partnerships with Western pension funds, and there’s enormous scope for further growth in the region; while 80 percent of the population in North Africa already come under a compulsory pension scheme, only 10 percent in sub-Saharan Africa are covered.

“Within three, four years you’ll see a transformative industry”, Hubert Danso, CEO of African Investor Group, told Institutional Investor. Growth in the near future is set to be especially strong in Nigeria, where the pensions industry is now almost three times the size it was in 2009, as a result of pension systems being liberalised and opened up to competition. South Africa continues to account for the largest pensions sector on the continent, with an estimated $252bn in assets.

There the state recently proposed a government-sponsored pension fund that would make contributions obligatory – a move other developing countries have also started looking towards as a means of increasing coverage and further boosting funds.

Among those is Peru, where some are pushing for regulation that would make contributions for everyone under the age of 40 compulsory – a ruling appealed in September. There remains huge potential for more coverage in the country, and that’s likely to be gradually tapped into as the focus moves towards educating people about the importance of pension saving. Elsewhere in South America, countries are seeing strong pension prospects, headed up by Chile and Brazil, which both scored well in the Mercer Pensions index.

Reform and diversification
It’s not just in emerging economies that pension reforms are starting to take effect; a new system in the UK comes into force in April 2015, offering pension savers greater freedoms – which could prove an incentive for more people to opt into schemes. Last May, Finland launched an alternative investment fund managers (AIFM) directive, encouraging the diversification of asset portfolios – something Sweden is also focusing on. The latter implemented new regulations last July, detailing standard debt investments versus alternatives, and widening out the definition of the latter.

Moving towards alternative investments and diversification is a trend being seen throughout the wider investment field across much of the globe, as fund managers adapt to changing market conditions and seek out the wisest possible investments; according to the Financial Times’ MandateWire, alternatives are attracting more attention than other major asset classes. A report by consultancy Mercer showed a similar trend, stating that investors were trying out “less familiar” investments for long-term payoffs.

A number of pension funds are capitalising on the potential benefits of those alternatives – including strong yields and less volatility – in order to optimise funds and achieve greater flexibility. Private equity is becoming an increasingly popular choice – as evidenced in Japan, where the Government Pension Investment Fund recently sold JPY 6.67trn ($55.4bn) in domestic bonds, shifting its focus onto equities to boost long-term returns. African pension funds are likewise strengthening their focus in this area.

Infrastructure too is predicted to attract greater interest from pension funds in the coming years, with other countries projected to follow in the footsteps of the UK’s Pensions Infrastructure Platform (PIP). Set up in 2012, the PIP sees pension funds pooling their funds together to approach challenges in a constructive, inventive way so as to secure larger, long-term investments with lower fees. “The basic philosophy of the PIP is infrastructure assets as a match for long-term inflation-linked cashflows”, said its CEO Mike Weston, who was appointed in September. “You are trying to match a long-term liability stream, so you want long-term predictability”, he added.