GLOBAL - Figures by Towers Watson show that defined contribution (DC) pension schemes are becoming increasingly important in some of the world’s biggest pension markets.
According to the consultancy’s Global Pension asset study for 2011, DC schemes now make up 44% of assets in 13 markets surveyed, up by 9 percentage points in the last decade.
Markets examined include the Netherlands, Switzerland and the UK, as well as Australia, the US and Brazil.
Roger Urwin, global head of investment content at Towers Watson, said the pressures placed on society in the wake of the crisis allowed changes to DC schemes to be accelerated, including bringing scheme design in line with members’ risk tolerances.
“Just as we have seen in the DB world, improving clarity around responsibility will lead to more effective governance of DC schemes and a real opportunity to improve the investment outcomes for millions of individuals,” he said.
“But governments must also support greater clarity around the roles and responsibilities of all stakeholders, including members, which in turn will help address a perennial DC stumbling block - clear and relevant communication.”
Switzerland has seen its share of DC pensions increase by 12 percentage points since 2000, with only 40% of assets now held in defined benefit (DB) schemes, while the Netherlands still sees the majority of assets held in DB schemes and only 6% invested by the new model.
The most drastic change is likely to be seen in the UK, where 97% of the market was occupied by occupational pensions and final salary schemes in 2000. This share has gradually been eroded, with 40% of assets now invested in DC schemes.
Of the seven largest markets, the UK also has the highest exposure to equity, with Japan opting for the highest exposure to bonds and Switzerland investing almost equally in equity, bonds and other investments, while less than 10% was held in cash.
Urwin said asset allocation remained complicated, especially in light of ever-changing market conditions.
“Notwithstanding the recovery in markets, asset allocation remains challenging, as companies and trustees balance such priorities as long-term de-risking, short-term market opportunities, rebalancing or maintaining a strategic asset allocation mix.”
Towers Watson’s global head of investment Carl Hess added that there were still constant reminders the recovery was still tenuous.
“While nervousness about the volatility of markets and extreme events is just below the surface, there is broad acceptance that this is the new normal and that investors will need investment strategies that are more flexible and adaptable than they have been in the past,” he said.