Weekly Newsletter – September 18, 2023 – Global Pension Returns!
Since the beginning of the pandemic, the financial world has experienced extreme volatility. Governments globally have spent trillions of dollars on stimulus packages while industries were shut down. As individual investors, we have also experienced highs and lows. But how have the largest global pension plans fared over the past two years?
Willis Towers Watson, a global leader in insurance products, has done some research. Through their "Thinking Ahead Institute," they have compiled detailed data on the world's largest pension plans and pension countries. As you would expect, Canada and the US are amongst the largest pension countries. Our own Canada Pension Plan and Ontario Teachers' Pension Plan are amongst the largest pensions in the world.
To be clear, the concentration of assets is staggering! The top 300 pension funds represent 41% of all pension assets globally, and the top 20 pension funds control 17% of all global pension assets. In Japan, the top pension funds account for 67.8% of all Japanese assets (the Japanese Government Pension Investment Fund represents 46.9% of all Japan pension assets), but in the US, the top 10 pension funds only represent 8.2% of all US assets – I like the US model!
The US is the largest pension market by far, followed at a significant distance by Japan and Canada. Together, though, these three markets account for over 76% of all pension assets globally. But the largest growth in pension assets over the past decade has been in China, followed by South Korea and India. Canada's pension growth rate has been 1.4% (USD denominated) annually since 2012, but inflation has risen by 2.34% over the same time period – looks like we are falling behind! These statistics make sense when you look at our median age and our fertility rate. Back in 1955, long before I was born, the median age in Canada was 26.3 years and our fertility rate was 3.83%. Today, our median age is 40.6 years and our fertility rate is 1.47%. Meaning that we are seeing much more money withdrawn from our pensions than deposited into pensions – even with large numbers of new Canadians immigrating to Canada.
When determining our performance and growth versus other countries, foreign currency valuations are important. The US dollar is the standard, as we all know. The US dollar index is a method used to determine how another country's currency is performing relative to the US and then against other countries' currencies. If over time our currency becomes devalued against the US currency, then the economic well-being of the country is devalued too. After the credit crisis, our currency was exceptionally strong – 1 Canadian dollar was worth $1.05 US dollars. Today, 1 Canadian dollar is only worth 74 cents USD. This is a devaluation of almost 30% against the US in the past decade.
The question arises: how do we combat shrinking inflows of money while maintaining our standard of living? If we, as taxpayers, are required to invest in our Canada Pension Plan or as a teacher in Ontario, invest in that particular pension plan, then that pension plan must at least outperform inflation over long periods of time. But unfortunately, that is not the case. At the end of 2022, the largest global pensions saw a negative 16.7% in assets and a negative return of 17.4% for a 60% global equity/40% bond portfolio. As interest rates rocketed higher in 2022, bonds dropped like a stone! Canada's return was negative 12.5% in US dollars.
Finally, the domestic equity exposure of the seven largest pension plans has dropped dramatically since the beginning of the century. Canada's domestic equity investment in 1999 was over 60% of the equity pension assets, but today it is only about 25% - the lowest of the seven largest pension countries. Does this mean that our pension plan managers (Canada Pension Plan) see better investments outside of our own country, and if so, is that because of government policies?
