20 Jan 2020 | Press Releases
PENSION FUNDS LOOK GLOBALLY FOR YIELD AS AUM FORECASTED TO REACH USD 61.1 TRILLION BY 2025
Low interest rate environments in many developed nations, alongside increasingly volatile equity markets, are leading pension funds to adapt their investment strategies. In their search for yield, many are looking outside their borders as well as investing in alternatives, according to a new report by the Association of the Luxembourg Fund Industry (ALFI) produced by PwC Luxembourg.
The report, which examines the growth of pension-fund assets, their foreign-investment limits, and other key trends, shows that pension-fund assets globally are expected to grow at a 5.4% Compound Annual Growth Rate (CAGR) between 2018 and 2025, rising from USD 42.2 trillion to USD 61.1 trillion. Latin American pension funds are expected to see the strongest CAGR with assets soaring by over 12% to reach USD 2.4 trillion.
In terms of asset allocation, equity continues to hold the crown, accounting for 38% of total pension assets at the end of 2018. However growth, in percentage terms, has turned negative – with allocation falling from 60% in 1998. Alternatives are expected to play an increasingly important role in pension funds’ portfolios as they continue to search for yield. In absolute terms, pension fund alternatives AuM has risen from USD 9.2 trillion in 2014 to USD 11.6 trillion at the end of 2018.
Globally, regulations governing pension fund foreign exposure continue to differ drastically. While the majority of countries examined do not set any limits regarding foreign investments, some have set limits for non-OECD or non-EEA countries. Additionally, others have set limits for specific asset classes. Overall, however, there has been an increase in pension funds’ foreign exposure since 2014, rising from 31% to 34% at the end of 2018.
Corinne Lamesch, ALFI Chairperson, commented: “Pension fund regulations still differ from one country to the other. In particular, some countries restrict the amount pension funds can allocate to investment funds or foreign investments. Consequently, navigating the terrain of complex local requirements can be challenging for asset managers.”
Oliver Weber, Head of Asset and Wealth Management, PwC Luxembourg, commented: “In light of the current global investment environment, pension funds, with their ability to weather periods of market instability, are also upping their allocations to alternatives, including notably illiquid assets such as private equity and infrastructure. In search for diversification, pension funds are not only looking in terms of asset class, but also geography. They are going beyond their borders in search for growth – either through direct investments or, increasingly, using funds such as AIFs or UCITS.”
Key findings of the report include:
Corrine Lamesch concludes: “Another key development since the 2015 edition of the report is the growing focus on sustainability of the investments made by pension funds. Luxembourg has been a pioneer in this field and is today the leading domicile for sustainable funds in Europe. Further, UCITS remains a key vehicle for many pension funds seeking exposure to worldwide markets. We expect this trend to continue given the sound regulatory framework, the high level of investor protection and the depth of global capability embedded in the structure.
The full survey is available on the ALFI website.
For more information, please contact:
Senior Communication Manager, ALFI
Tel: +352 22 30 26 – 59
Notes to editors:
The Association of the Luxembourg Fund Industry (ALFI) represents the face and voice of the Luxembourg asset management and investment fund community. The Association is committed to the development of the Luxembourg fund industry by striving to create new business opportunities, and through the exchange of information and knowledge.
Created in 1988, the Association today represents over 1,500 Luxembourg-domiciled investment funds, asset management companies and a wide range of businesses that serve the sector. These include depositary banks, fund administrators, transfer agents, distributors, legal firms, consultants, tax advisory firms, auditors and accountants, specialist IT and communication companies. Luxembourg is the largest fund domicile in Europe and a worldwide leader in cross-border distribution of funds. Luxembourg-domiciled investment funds are distributed in more than 70 countries around the world.
For further information, do not hesitate to consult www.alfi.lu. To keep up with all the news from ALFI and the fund industry in Luxembourg, join us on LinkedIn (The Luxembourg Fund Industry Group by ALFI), Twitter (@ALFIfunds), Youtube and Vimeo.