South America leads pension fund growth

peru marketSouth America's pension funds are growing their assets at the fastest rate globally and the level of international investments by funds in various regions is growing, research shows.

Between 2008 and 2014, pension funds in South America increased their assets on a compound annual growth basis by over 19%, from $184 billion (€163 billion) to $528 billion.

The research, published by the Association of the Luxembourg Fund Industry (Alfi) and carried out by PwC Luxembourg, also shows that South American pension funds have some of the highest levels of international asset allocations.

An aggregate rate of growth for overseas investment by South America pension schemes was not given, but the report notes that Chilean funds had 44% of total assets invested in foreign markets in 2014 and the level of overseas investments by Peruvian funds was 41%.

However, Brazil invested less than 1% in foreign markets in 2014 due to stringent regulatory barriers, though Alfi says these are beginning to soften.

In North America a figure for US schemes’ overseas investments was also not available, but Mexican pension funds increased foreign investment from 6% of their total portfolio in 2008, to 12% in 2014.

Asia Pacific pension funds increased overseas investment from 19% in 2008 to 31% in 2014. Hong Kong and Japan are the most aggressive investors in foreign investments within Asia.

Dariush Yazdani, partner of PwC Luxembourg market research centre, says the growth of overseas investments – which is also recorded in many OECD countries and Europe – runs in line with the growing challenge of higher retirement costs.

“The new millennium has changed the playing field for pension funds. There are significantly more people retiring today than there were even a decade ago and this is putting pressure on pension funds' investment strategies.”

However, pension fund managers are “facing a future brimming with opportunities” as they have the ability to focus on long-term investments and diversify them – and one of the most effective means of achieving diversification diversify through foreign exposure, Yazdani says.

Overseas investment by pension funds from most OECD countries (excluding the US) jumped from about 25%, on average, of their total assets in 2008 to almost 31% in 2014.

European pension funds increased overseas investments from 32% in 2008 to 34% in 2014. The Netherlands, Finland and Portugal were the highest international allocators.

For less developed pension markets, a higher usage of investment funds is expected over the coming years. The report says developing countries are likely to follow the move of the Chilean pension funds, which have been achieving higher diversification through the use of Ucits funds.

The report – called Beyond their borders: evolution of foreign investment by pension funds – also shows that investment in alternative assets by pension funds globally increased by 117%, from $4.4 trillion to $9.7 trillion, between 2008 and 2014.

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