Tuesday 16 February 2021 8:34 am

Japan overtakes UK as world’s second largest pension market

The UK pensions market was overtaken in size by Japan in 2020, pushing the UK to third place.

The United States retained its position as the largest pension market in the world, making up 62 per cent of worldwide pensions assets. Japan and the UK represented 6.9 per cent and 6.8 per cent respectively.

The UK market has recorded a compound annual growth rate of 4.6 per cent over the last 10 years.

Among the seven largest pension markets – Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US – the UK has the smallest allocation (8%) to alternative assets such as real estate, versus the average of 26 per cent. The UK’s allocation to bonds is 65 per cent and equities is 26 per cent.

In 2020 there was a significant rise in the ratio of pension assets to average GDP, according to Willis Towers Watson, up more than 11 per cent to 80 per cent during the year, representing the largest increase since records began in 1998.

While the measure usually indicates a stronger pension system, the sharp rise also underlines the economic impact of the pandemic on many countries’ GDP.

Among the seven largest pension markets, the trend was even more pronounced with a 20 per cent rise in the pension assets to GDP ratio to 147 per cent in 2020, from 127 per cent the year before. 

Marisa Hall, co-head of Willis Towers Watson’s Thinking Ahead Institute, said the growth of pension funds, combined with defined contribution pensions becoming the global dominant pensions model, paints a picture of a resilient industry.

“We believe one of the main challenges for pension funds, and opportunities for impact, is the effective stewardship of their assets,” she continued.

“It is clear that the unstoppable ‘ESG train’ is picking up pace, and in some cases is being turbo-charged by climate change and the accelerating path to net zero. It is this focus on sustainability that will truly shape the pensions industry in the coming decades.

“A significant reallocation of capital is expected as the investment world undergoes a paradigm shift in extending its traditional two-dimensional focus on risk and return to one of risk, return and impact.”