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OECD Pension Assets Hit Record Level in 2017

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Pension assets continued to rise in 2017, to the tune of USD 43.4 trillion in the OECD area for the first time, with almost all countries showing positive investment results according to the new Pension Markets in Focus 2018 report published in October 2018 by the Organization for Economic Cooperation and Development (OECD).

This annual report, which now covers 87 countries, gives an overview of private pension systems worldwide and outlines latest developments. It assesses the amount of assets in funded and private pension plans, describes the way these assets are invested in financial markets, and looks at how investments have performed, both in the past year and over the past decade.

It provides accurate, comprehensive, comparable and up-to-date statistics to help policymakers, regulators and market participants measure, compare and evaluate programme developments and country experiences globally. The report also includes a special feature on the main factors driving the evolution of the funding position of defined benefit plans.

The rise, according to the report, can be attributed to the strong investment performance of pension assets that benefited from buoyant stock markets Recent years have witnessed intense pension reform efforts in countries around the globe, often involving an increased use of funded pension programmes managed by the private sector.

These funded arrangements are likely to play an increasingly important role in delivering retirement income in many countries, and privately managed pension assets will play an increasing role in financial markets, notably as a source of long-term savings.

The overall amount of assets has grown every year since the financial crisis (except in 2015) and is well above the 2007 pre-crisis level. A majority of these assets are held in pension funds (USD 28.5 trillion).

High investment returns from booming stock markets partly explain the growth of pension assets

The real net investment rate of return on pension assets exceeded 4% on average, both inside and outside the OECD area in 2017. Real investment rates of return, net of investment expenses, were above 5% in 22 (including 12 OECD countries) out of the 60 reporting jurisdictions.

Booming stock markets worldwide underpinned these positive results, with jurisdictions where equities form the largest part of the investments of pension asset managers (e.g. Australia and Poland) benefiting in particular. Pension assets achieved a 7.5% real net investment rate of return in the United States, the largest pension market in terms of assets.

The investment performance of pension assets over the last 15 years is positive in most countries

It is important to assess investment performance of funded and private pensions over the long term as saving for retirement has a long-term horizon. Most reporting countries have achieved positive real average annual net investment rates of return since 2002.

The strongest real average annual return (net of investment expenses) over the last 15 years among the 21 jurisdictions for which this calculation is possible was achieved in Colombia (6.9%), followed by Canada (5.5%) and the Netherlands (5.3%).

The funding position of defined benefit plans has deteriorated in the last decade in many countries as liabilities grew faster than assets

Some of the largest markets (e.g. Canada, Switzerland and the United States) still hold a significant share of assets in defined benefit (DB) plans. Although assets kept growing in most reporting countries with DB plans, they were not able to keep pace with the growth of liabilities.

This has led to a deterioration of the funding ratio of DB plans at the national level in many countries. In Iceland, Indonesia, Mexico, the United Kingdom, and the United States, ratios, already below 100% for some time, fell even further. Inflows from contributions and investment income in DB plans were higher than outflows from benefit payments and other expenses.

The further increase in liabilities is probably due to increases in life expectancy and declines in interest rates. Changes in the benefit formula or declines in maximum accrual rates have been insufficient to control the increase of liabilities at the national level.

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