GLOBAL - Pension funds in emerging markets countries are growing rapidly but are restricted in growth compared with their counterparts in developed markets because they have smaller equity markets, Deutsche Bank has found.
Pension funds in countries like Chile, South Africa and Singapore reached maturity once they had grown to around 60% of the respective country's gross domestic product.
But among the G10-states the average for a mature pension fund, when contributions and benefit payments reach an equilibrium preventing further growth, is 98% of GDP.
"Pension fund and financial market development are linked, and therefore growth of pension fund assets as a percentage of GDP will be in parallel with the growth of the domestic capital market," Angus Halkett, strategist at Deutsche Bank, said in a paper entitled The rise of pension funds in emerging markets.
"This is probably the result of a virtuous cycle of availability of capital and investment opportunities," he added.
That means with continuing growth of emerging market economies together with steady inflows into the mostly mandatory retirement plans, pension fund assets will edge increasingly towards the G10 average.
Deutsche Bank valued total pension funds assets in emerging markets countries at $1.1trn (€816bn) at the end of last year. Annual inflows for 2006 were calculated to around $46bn. The study sees another $2.8trn rise in assets at today's GDP levels and prices before all funds reach the 60% maturity mark.
"However, it is possible that in the long-run we can assume some convergence with G10," the researcher noted. "Further growth is limited by the development of capital markets in the country."
Apart from outside investors, emerging market pension funds themselves will help to grow equity markets, DB said.
"With time, equity allocations will increase from the current level of 23% towards 50% of assets under management," said the report.