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PENSION MARKETS IN FOCUS November 2007, Issue 4 In this issue Highlights .......................................2 Section 1: Overview of Assets Accumulated in Funded Pension Arrangements ................3 Section 2: Sovereign and Public Pension Reserve Funds: An Overview .............................. 15 News in Brief ............................... 21 Recent and Forthcoming OECD Meetings and Publications on Funded Pensions ................. 23 Financial Affairs Division of the OECD Directorate
    P ENSION M ARKETS IN F OCUS   November 2007, Issue 4 In this issue Highlights .......................................2Section 1: Overview of AssetsAccumulated in FundedPension Arrangements ................3Section 2: Sovereign and PublicPension Reserve Funds:An Overview ..............................15News in Brief ...............................21Recent andForthcoming OECDMeetings and Publicationson Funded Pensions .................23    © 2007 OECD – Pension Markets in Focus – November 2007 – Issue 4 Financial Affairs Division of theOECD Directorate of Financialand Enterprise Affairs. Please address allcorrespondence to:  If you wish to subscribe to PensionMarkets in Focus please send anemail with your full contactdetails.Pension Markets in Focus can bedownloaded at:   This publication was prepared by thePrivate Pensions Unit with informationprovided by the OECD Task Force onPension Statistics, sub-group of theOECD Working Party on Private   PensionsEditors:Jean-Marc Salou, Juan YermoResearch:Yu-Wei Hu, Stéphanie PayetPublishing:Edward Smiley 2006 saw a continued, steady expansion of pension funds inOECD and selected non-OECD countries. Fundedarrangements are playing an increasingly important role indelivering retirement income security in many countries andreforms to encourage the safe development of privatepensions are now in place in many countries. In numerousOECD countries where pension fund markets are still currentlyin their infancy, there is a huge potential for growth.The global pension landscape is also expanding with theemergence of new sovereign and public pension reservefunds (SPFs) and rapid growth of existing ones. These funds,which this publication has been monitoring since 2005, arebecoming a key financing element of pension systems. Theyare expected to witness rapid growth over the next years aspolicymakers attempt to better protect social security systemsfrom the effects of population ageing. SPFs have become avery useful tool for future public pension reforms, and in thisrespect, may also call for appropriate regulatory framework,along the lines of those provided for private pension funds.As in previous editions, this fourth edition of ‘Pension Markets inFocus’ also reviews recent trends in long-term and retirementsavings, their size and economic significance, and trends inasset allocation. As of 2006, there was a slight shift to bondsrecorded by the OECD Global Pension Statistics indicators.We also report that pension funds are increasingly diversifyingtheir portfolios and looking to enhance returns through moresophisticated strategies, including through the use of a rangeof alternative investments. Nevertheless, despite the increasingpopularity of alternative investments in the pension investmentcommunity, a number of key issues should be addressedcarefully if fiduciaries and sponsors are looking for a long-termsolution to funding shortfall problems. These include moretransparent investment disclosure, better understanding andconfidence on the part of pension fund fiduciaries, and moreconsistent performance measurement.André Laboul Head of the Financial Affairs Division,Directorate of Financial and Enterprise Affairs, OECD       Highlights Section 1: Pension fund markets in OECDand selected non-OECD countries Total pension fund and retirement assets in 2006     In 2006 the total OECD funded pensionsmarket, including both occupational(workplace-related) and personalarrangements, was valued atapproximately USD 24.6 trillion (EUR 19.6trillion). Of this, 66.1%, valued at USD 16.2trillion (EUR 12.9 trillion), was held by pensionfunds, 17.7%, worth USD 4.3 trillion (EUR 3.4trillion), was held in retirement productsprovided by banks or investmentmanagement companies, 14.1% (USD 3.5trillion or EUR 2.8 trillion) was held in pensioninsurance contracts – run by life andpension insurance companies – and 2.1%(USD 0.5 trillion or EUR 0.4 trillion) were “bookreserves”, a form of identified reserves orprovisions for pension payment purposes inthe balance sheet of the sponsoringcompany. Growth in world’s pension fund assets Average growth rate by region, 2004-2006 9.023.326.97.813.   WorldBRICsLatin   AmericaAsiaEuro   areaTotal   G10Total   selected   non ‐ OECDTotal   OECD 2 © 2007 OECD – Pension Markets in Focus – November 2007 – Issue 4 0 5 10 15 20 25 30 %      Large pools of pension assets have alsobeen accumulated in non-OECDeconomies. In terms of volume of assets,these markets remain comparatively smallin relation to OECD ones, with a total ofUSD 0.6 trillion, as shown in Table 1.However, pension assets in non-OECDeconomies grew much faster than those inOECD countries. For example, theaverage growth rate between 2004 and2006 was 8.1% in G10 countries and 13.6%in the Euro area, while this ratio was muchhigher in the Latin American countries(26.9%) and BRICs (23.3%). When bothOECD and non-OECD economies aretaken into account together, the worldpension funds were equivalent to USD 16.9trillion in 2006, up from USD 14.2 trillion in2004, while the associated growth ratewas 9.0% during this two-year period. Asset allocation     In the OECD and selected non-OECDcountries as a whole, bonds and sharesremain the two most important assetclasses for pension funds and accountedfor half of the total investments in mostcountries in 2006. In many countries, thesetwo asset classes accounted for over 80%of the total portfolios. The highest shareallocations were observed in the RussianFederation (59.9%), the Netherlands(54.6%), United States (49.6%) and Hong-Kong, China (49.7%). Section 2: Sovereign and public pensionreserve funds (SPF) in OECD countries Total SPF fund assets     The assets managed by Sovereign andPublic Pension Reserve Funds - establishedto support the “Pay as you go” liabilities ofstate pension schemes – are growing morerapidly than those of pension funds. TotalSPF assets in OECD countries were worthUSD 4.1 trillion in 2006, approximately onequarter of pension fund assets. From 2001to 2006, the average growth rate in SPFassets in US dollar terms was 9.1%.    In certain countries, the value of SPF assetsrelative to the economy far exceeds thatof private pension funds. For example,Norway had the largest SPF, with an asset-to-GDP ratio of 83.0%, in 2006 (6.8% forpension funds). Other countries where SPFswere significant relative to the economyinclude Sweden at 30.6% (9.5% for pensionfunds), Japan at 27.9% (23.4% for pensionfunds) and Korea at 21.5% (2.9% forpension funds). On average, the ratio ofSPF assets-to-GDP was 23.9% for OECDcountries.    SPF asset allocation     SPF asset allocations vary considerablyand in some cases a conservative portfoliois mandated by law (in Spain and in theUnited States, for example). Most SPFshave higher risky investment strategies dueto the long investment horizon. Ireland’sNational Pensions Reserve Fund had thehighest share weighting at 77.1%. OtherSPFs with a high share weighting includeCanada (58.5%), France (62.1%), Sweden(59.5%) and New Zealand (60.0%).    There is a trend towards increasedexposure to alternative assets. While inmost cases the allocation remainscomparatively small relative to thetotal portfolio, the New ZealandSuperannuation Fund substantiallyincreased its allocation to alternativeinvestments – to 12.7% in 2006, up from0.5% in 2005. Section 1: Overview of Assets Accumulated inFunded Pension Arrangements In 2006 the total OECD funded pensions market, including both occupational (workplace-related)and personal arrangements, was valued at approximately USD 24.6 trillion. Of this, 66.1%, valuedat USD 16.2 trillion, was held by pension funds, 17.7%, worth USD 4.3 trillion, was held in retirementproducts provided by banks or investment management companies, 14.1% (USD 3.5 trillion) washeld in pension insurance contracts – run by life and pension insurance companies - and 2.1%(USD 0.5 trillion) were “book reserves”, a form of identified reserves or provisions for pensionpayment purposes in the balance sheet of the sponsoring company. In 2006, Denmark, at 139.3%, had the highestratio of pension plan assets relative to GDP,as shown in Figure 1. Pension insurancecontracts accounted for almost two thirds ofthe total Danish market. Other countries witha large private pension market relative toGDP included the Netherlands (138.0%),Iceland (137.6%), Switzerland (122.1%), theUnited States (120.5%), and Canada(102.7%). In comparison to Denmark, forthese five countries, the most commonfinancing vehicle was pension funds.In the remaining OECD countries, aggregatenational pension plan assets, including allavailable financing structures, were worthless than GDP, ranging from 1.0% in Turkey,3.3% in Italy, 12.7% in Spain, 56.8% in Sweden,89.1% in the United Kingdom to 94.3% inAustralia. Across these 23 countries pensionfunds are the main financing vehicle, withthe exception of three countries: Sweden,Korea and France.Based on the OECD classification, there arethree main types of funded private pensionplans: pension funds (autonomous), bookreserves (non-autonomous) and pensioninsurance contracts, as well as a residualcategory, “Other”, which includes anyprivate pension arrangements not includedabove. The distinction between these plansis the financing vehicle (for definitions seeBox 1).The continuing economic and socialimportance of pension funds across theOECD area is evident from the dominanceof occupational pension arrangements inprivately managed pension systems.Occupational pensions are overwhelminglyfunded via pension funds in most OECDcountries. Personal plans, on the other hand,in many countries are funded via pensioninsurance contracts or financial productsprovided by banks and asset managers. Themain exception to this distinction betweenoccupational pension funds and individualinsurance contracts are the nationalmandatory individual account pension plansestablished in countries such as Hungary,Mexico, Poland and the Slovak Republic,which are financed only via pension fundsduring the asset accumulation stage.  © 2007 OECD – Pension Markets in Focus – November 2007 – Issue 4 3      Figure 1. Heterogeneity of financing vehicles used in funded pension arrangements across OECDcountries, 2006 % GDP and in absolute terms (USD billion)   (0)(4)   (2)   (62)   (6)   (23)(155)(68)   (28)   (11)(38)   (98)   (13)   (155)   (59)(30)   (512)   (1,021)   (110)   (218)(163)(2,117)   (687)(1,306)(15,886)   (462)   (22)   (914)   (385)   0 20 40 60 80 100 120 140 160GreeceTurkeySlovak   RepublicItalyCzech   RepublicNorwayFranceKoreaAustria   (4)HungaryPolandMexicoNew   ZealandSpain   (2)Belgium   (2)PortugalGermany   (3)JapanIrelandSwedenFinlandUnited   Kingdom   (2)AustraliaCanadaUnited   StatesSwitzerlandIcelandNetherlands   (2)Denmark %   GDP PensionfundsBookreservesPensioninsurancecontractsOthertypes   (1)   Source  : OECD, Global Pension Statistics. Geographical distribution of pension fund assets 2006 saw a continued, steady expansion of pension funds in OECD countries, with total assetsincreasing from USD 15.0 trillion in 2005 to USD 16.2 trillion, as shown in Table 1. In US dollar terms,the growth rate for 2005-2006 was 8.2%, which was lower than in the previous year (9.8%). In absolute terms, the United States had thelargest pension fund market in the OECD withassets worth USD 9.7 trillion – approximatelytwo thirds of the total OECD aggregatemarket, as shown in Figure 2 and Table 1. TheUS’ share of OECD pension fund assets,however, has shrunk from a level of 68% in2001 to 60% in 2006. Apart from the UnitedStates, other OECD countries with largepension fund systems include the UnitedKingdom (USD 1.8 trillion), Japan (USD 1.0trillion), the Netherlands (USD 0.9 trillion),Australia (USD 0.7 trillion), Canada (USD 0.7trillion) and Switzerland (USD 0.5 trillion). Forthese six countries, the share of the wholeOECD pension fund market was 11.3%, 6.3%,5.3%, 4.2%, 4.2% and 2.8%, respectively.For the remaining 23 OECD countries, in 2006total pension fund assets were valued atapproximately USD 1.0 trillion, whichaccounted for 6.0% of the OECD total. 4 © 2007 OECD – Pension Markets in Focus – November 2007 – Issue 4
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