Study: Alternatives allocations expected to rise

Pension funds have been ramping up exposure to alternatives – with some of the world’s largest pension markets recording a rise in average allocations to 19% from 5%. Consultancy Towers Watson is ‘confident’ the numbers will keep rising.

Some good news for GPs on the fundraising trail: pension funds have significantly increased their allocations to alternative asset classes in the last decade, and this is likely to continue, according to a recent survey of global pensions by advisory Towers Watson.

Alternative asset allocations for ‘P7’ countries – defined as the UK, Switzerland, the Netherlands, the US, Australia, Canada and Japan – rose to an average of 19 percent in 2012, compared to 5 percent in 1995, according to Towers Watson’s latest global pension survey. Assets from the so-called P7 account for 95 percent of the assets from the 13 major pension markets the study covered, including  Brazil, France, Germany, Ireland, Hong Kong and South Africa. The largest pension markets are the US, Japan and the UK, respectively holding 57 percent, 13 percent and 9 percent of total pension assets.  

The most dramatic increase over the 1995-2012 period was in the UK, where pensions’ allocations to alternatives rose to 17 percent from 3 percent, representing a 133 percent increase. This was followed by Switzerland, where pensions increased allocations to 30 percent from 18 percent in the last decade. The only market studied where allocations fell slightly during the last decade was the Netherlands, where pensions allocated an average of 16 percent to alternatives, down from 19 percent. 

The current fundraising challenges are well documented and this provides perhaps some light at the end of the tunnel for some [private equity fund] managers

Mark Calnan

“The fundamental and structural benefits of these specific alternative asset classes [such as diversification and access to manager skill] are here to stay. Therefore, we are confident that over the medium term, alternative asset classes in absolute terms and as a proportion of total pension fund assets will increase over time,” Mark Calnan, global head of private equity at Towers Watson, told Private Equity International, Infrastructure Investor's sister publication. 

“The current fundraising challenges are well documented and this provides perhaps some light at the end of the tunnel for some [private equity fund] managers,” Calnan added. 

As well as investing more in alternatives, global pension fund assets increased, the study found. The 10-year average growth rate of global pension funds in local currency was more than 8 percent. In addition, UK institutional pension funds assets more than doubled in the last decade and were £1.7 trillion in 2012, the highest ever, according to the report. 

There are a number of things that drive the increase in total assets of pension funds, Calnan said. “The returns that are generated in the portfolio, the cash flows that are provided by the participants in the underlying pension funds; they are the drivers of increasing the absolute size of those pension pots. As a ratio, if you have a growing work force globally and increasing appetite to pay into pensions – which is clearly the goal from regulators, then that would support that trend as well,” he said. 

The study did not break down the increased allocation to alternative assets in detail, but said the increase was “especially in real estate and to a lesser extent hedge fund, private equity and commodities”. According to Towers Watson’s Global Alternatives Survey published last summer, private equity accounted for $696 billion of the $3.1 trillion managed by the top 100 global alternative asset managers.