Pension assets have grown steadily since 2008 and have experienced positive returns over the past 5 to 10 years. However, pension systems still face challenges arising from the current environment of protracted low interest rates.

Private pension assets represented 126 percent of gross domestic product (GDP) on average (weighted by total assets) in Member countries of the Organisation for Economic Co-operation and Development (OECD) at the end of 2014.[i] As shown in figure 1, in 7 OECD countries, private pension assets exceed the size of their economy: Denmark (209.2 percent of GDP), the Netherlands (159.3 percent of GDP), Iceland (154.8 percent of GDP), Canada (144.6 percent of GDP), the United States (139.5 percent of GDP), Switzerland (120.3 percent of GDP), and Australia (112.9 percent of GDP). In contrast, private pension assets remain below one-fourth of GDP in 20 OECD countries.

Figure 1. Private Pension Assets by Type of Financing Vehicle in OECD Countries, 2014

(As a percentage of GDP)

Source: OECD Global Pension Statistics.

Notes: (1) Data do not cover the whole private pension system. (2) Data refer to the weighted (by total assets) and simple average of the ratio of private pension assets to GDP. For additional information, seeOECD, Pension Markets in Focus, n°12, November 2015 (Paris, 2015).

In OECD countries, autonomous pension funds are the main financing vehicle for private pension plans, with $25.2 trillion of assets under management, which represented 66.8 percent of total private pension assets at the end of 2014.[ii] Banks and investment companies’ managed funds accounted for 21.0 percent of total private pension assets with $7.9 trillion, followed by pension insurance contracts managing $4.4 trillion (11.6 percent of total private pension assets) and employers’ book reserves ($0.2 trillion or 0.6 percent of total private pension assets).

Since the financial crisis in 2008, autonomous pension fund assets have grown on average by 8.1 percent yearly in the OECD, reaching a record high exceeding $25 trillion at the end of 2014. As a result of the financial crisis, which led to a decrease of 19.4 percent in assets between end-2007 and end-2008, the average growth of autonomous pension fund assets (in dollars) over the past decade (December 2004–December 2014) is lower than the average over the past 6 years, but is still positive, with a yearly increase of 5.5 percent.

The growth of autonomous pension fund assets in 2014 was underpinned by positive investment returns. All the reporting OECD countries recorded positive real investment returns, net of investment management costs, in 2014, ranging from 1.2 percent in the Czech Republic to 16.7 percent in Denmark, with an OECD weighted average of 5.0 percent (figure 2).

Figure 2. Autonomous Pension Fund Real Net Investment Rate of Return in Selected OECD Countries, December 2013–December 2014

(In percent)

Source: OECD Global Pension Statistics.

Notes: Data have been calculated using a common formula for the average nominal net investment return (ratio between the net investment income at the end of the year and the average level of assets during the year) for all the countries, except for Israel, Korea, and Turkey, for which values have been provided by the countries or come from national official publications. The net investment income that is used in the formula is reported before tax and after deduction of investment management costs. Average real net investment returns have been calculated using the nominal investment rate of return (as described above) and the variation of the end-of-period consumer price index between 2013 and 2014. For additional notes, see OECD, Pension Markets in Focus, n°12, November 2015 (Paris, 2015).

The investment performance of autonomous pension funds measured over the past 5 years was positive in real terms in all reporting OECD countries (table 1). Despite the weak returns and sharp drop in pension assets during the financial crisis, the 10-year average annual returns remain positive in most countries, except in Estonia (−1.7 percent).

Table 1. Autonomous Pension Fund Nominal and Real 5-Year and 10-Year Geometric Average Annual Returns in Selected OECD Countries

(In percent)

Source: OECD Global Pension Statistics.

Note: For more information, see OECD, Pension Markets in Focus, n°12, November 2015 (Paris, 2015).

Regardless of these good performance indicators, the current environment of low interest rates poses serious challenges to pension systems. Prolonged low interest rates affect both the assets and liabilities of pension funds. The impact of low interest rates is different for defined benefit (DB) and defined contribution (DC) pension plans. Low interest rates may deteriorate the solvency position of DB pension plans, as long-term government bond yields have an impact on assets as well as on liabilities through the calculation of the present value of future promises. The impact of low interest rates on DC pension plans operates through a reduction in the amount of assets accumulated to finance retirement and an increase in annuity prices, which can affect the adequacy of plan members’ retirement income.

The OECD Business and Finance Outlook 2015 called for vigilance by regulators, as pension funds may become involved in an excessive “search for yield” in trying to secure explicit or implicit benefit promises by increasing the risk profile of their portfolios. The concern is that, as pension funds move into riskier investments, they may be seriously compromising their solvency situation (for DB plans) and their capacity to deliver adequate retirement income (for DC plans) in the event of a negative shock in financial markets.

Autonomous pension funds in OECD countries mainly invest in traditional asset classes (figure 3). They invested 23.8 percent of their portfolio in equities, 51.3 percent in bills and bonds, and 9.6 percent in cash and deposits on average in 2014. The total allocation to these asset classes, considered as “traditional”, was therefore 84.7 percent on average.

Figure 3. Autonomous Pension Fund Asset Allocation for Selected Investment Categories in Selected OECD Countries, 2014

(As a percentage of total investment)

Source: OECD Global Pension Statistics.

Notes: The OECD Global Pension Statistics database provides information about investments in collective investment schemes and a further breakdown of these investments into cash and deposits, bills and bonds, equities, and other (look-through approach). When the look-through was not provided by the countries, estimates were made assuming that mutual funds’ investment allocation in cash and deposits, bills and bonds, equities, and other was the same as pension funds’ direct investments in these categories. Therefore, asset allocation data in this figure include both direct investment in equities, bills and bonds, and cash and deposits, and indirect investment through collective investment schemes. For more information, seeOECD, Pension Markets in Focus, n°12, November 2015 (Paris, 2015).

A recent analysis in the OECD Pension Markets in Focus 2015 shows that a shift in portfolio composition to equities, to alternative asset classes including derivatives, or to foreign investments happened in some countries between 2004 and 2014.[iii] While autonomous pension funds in small pension markets may tend to favor equities to get higher returns, pension funds in most of the largest pension markets have shown an increasing interest in alternative asset classes, such as real estate in Canada, derivatives in the United Kingdom, and other investments in the United States. Most of the countries put ceilings on pension funds’ exposure to alternative assets, except a few large markets. Investing abroad is another way for pension funds, like the Chilean pension funds, to search for higher returns, though geographical diversification in some instances may reduce risk.

Understanding how the underlying risk associated with each asset class contributes to the risk of the portfolio as a whole is essential for regulators and supervisors to monitor the extent to which “search for yield” may become a threat to pension systems. Even pension funds that are decreasing their exposure to alternative asset classes may actually increase the risk profile of their portfolios if they invest in less secure forms of bonds or equities.

About the authors

Stéphanie Payet is a private pensions analyst in the OECD Financial Affairs Division. She works on issues related to retirement savings adequacy, pension coverage, and plan design. Before joining the OECD, she was a statistical project manager in health economics. She has a master of science degree in statistics from the French National School for Statistics and Information Analysis.

Romain Despalins is a statistician in the OECD Directorate for Financial and Enterprise Affairs. He is responsible for the management of pension and insurance statistics. Prior to the OECD, he worked on health statistics in the public and private sectors. He has a master of science degree in statistics from the French National School for Statistics and Information Analysis.