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UK, January 24, 2007 - Global institutional pension fund assets in the 11 major markets have more than doubled¹ during the past ten years and now total US$23,200 billion, according to Watson Wyatt’s Global Pension Assets Study released today, having grown at a compound annual rate of 7.5%. The assets have also increased from 58% to 81% as a proportion of the Gross Domestic Product (GDP) of the countries included in the survey.

Roger Urwin, global head of investment consulting at Watson Wyatt, said: “This growth is a relief for countries needing to mitigate the effects of adverse demographics in which dependency ratios² are set to rise significantly. The situation implied by this data is encouraging in most countries, barring France and Germany.”

During 2006, global pension assets grew by around 11% in local currency terms and just over 13% in US dollar terms. At the same time the global pensions balance sheet strengthened, with asset liability indicators suggesting it is in the best relative position since the end of 1999.

Roger Urwin said: “While assets have clawed back a lot of ground in the past four years, liabilities have continued to increase because of mortality improvement and lower long-term bond yields. So despite improvements, it is still too early to characterise the global balance sheet as ‘strong’.”

Other highlights from the report include:

Ten-year global asset data for the P11

• Most countries have at least doubled their pension fund assets in local currency terms, with Japan and Germany being exceptions
• The US, Japan and UK, respectively, were the largest pension fund markets in 1996, and this remained the case in 2006, but with the UK making up ground on Japan
• The US represented the largest market by some margin at the end of both 1996 and 2006, accounting for around 60% of total pension fund assets globally
• Australia and Ireland had the highest growth rates in this period of 14.6% p.a. and 13.0% p.a. respectively
• Germany and Japan had the lowest growth rates during this period of 3.8% p.a. and 4.7% p.a. respectively.

Asset Allocation for the P7

• From 1996 to 2006: Equity allocations grew to 60.2% from 51.6% and bond allocations reduced to 25.5% from 36.5%
• Other assets, especially real estate and to a lesser extent hedge funds, private equity and commodities, have shown growth in recent years.

Roger Urwin said: “We see in the recent trends a levelling off in the growth of the equity content and a turning point in which both bond allocation and alternative assets are set to grow. Factors driving this more defensive strategy include the improved funding positions allowing investment goals to be moderated, changes to local regulation and accounting that previously favoured equities and maturing liabilities.

As a result, asset diversity is fast becoming mainstream in many markets as pension funds seek to work their assets harder to meet stubbornly high liabilities while at the same time reducing overall risk in the portfolio. We are also seeing funds increasing their targets from active investment management (alpha), a move that will inevitably be disappointing for many.”

Global liability³ data for the P7

• Between 1998 and 2006 the Watson Wyatt global liabilities indicator showed an increase of 37.5%, while global assets rose by 34.4%
• Between 1998 and 2002, global liabilities substantially outperformed assets, leaving weak solvency positions for most defined benefit funds, however in recent years the situation has been reversed
• During 2006 global defined benefit assets grew 11.1%, while liabilities showed a 5.9% growth.

Roger Urwin said, “Local pension fund balance sheets continued to strengthen in 2006 largely due to rising equity markets. Increases in employer contributions have also helped.”

Defined Benefit (DB) vs. Defined Contribution (DC) for the P7

• There has been a general switch from DB to DC during the last ten years
• Australia has the highest proportion of DC pension assets, having increased them from 73.4% to 90.6% of overall assets between 1997 and 2006
• In 2006, the US had the second highest proportion of assets in DC (54%), while Japan and the Netherlands only had about 1% each in DC
• During the nine years to the end of 2006, total DC pension fund assets grew at an average annual rate of 9.8% compared with 5.5% for DB. The share of total global DC assets relative to DB grew from 34% to 42% during this period.

Roger Urwin said: “The rise of DC continues apace. Given the current high growth rate of DC assets, and taking into account maturing DB assets, DC should overtake DB somewhere around the year 2014.”

Trends and changes among pension funds

According to the Global Pension Assets Study, pension fund investment is subject to change on an unprecedented level. It highlights six specific changes that are affecting the industry in all countries and to a material extent. Four of these changes concern investment strategy of which the most prominent is Liability Driven Investment. The others are:

• Increased use of absolute return mandates and alternative assets
• Alpha beta separation and integration
• Beta prime innovation, capturing systematic ‘alpha’ effects in index form
• Reducing DB funds’ risk budgets to match with sponsor covenant and risk appetite
• Increasing fund power to influence pricing and product design, particularly when there is collaboration.

Roger Urwin said: “The impact of technology, particularly its influence on shared knowledge of finance theory and best practice, is making the clock-speed of our industry tick ever quicker, more than in any prior period. The pressures on pension plan sponsors and fiduciaries to keep up with change is intense.”

Notes to editors

• The P11 refers to the 11 largest pension markets included in the study which are Australia, Canada, France, Germany, Hong Kong, Ireland, Japan, Netherlands, Switzerland, the UK and the US
• The P7 refers to the 7 largest pension markets and exclude Germany, France, Ireland and Hong Kong from the P11
• All dates refer to the calendar end of that year.

The Global Pension Assets Study
Read more

For more information contact

Paul Deane-Williams
Senior Investment Consultant
Watson Wyatt Limited
+44 (0)1737 274397
paul.deane-williams@watsonwyatt.com

Sally Todd
Penrose Financial
+44 (0)207 786 4815
watsonwyatt@penrose.co.uk

About Watson Wyatt Investment Consulting

Watson Wyatt Investment Consulting, a division of Watson Wyatt, is focused on creating financial value for institutional investors through independent, best-in-class investment advice. We are specialist investment professionals who provide co-ordinated investment strategy advice based on expertise in risk assessment, strategic asset allocation, and investment manager selection. Watson Wyatt Investment Consulting provides investment advice to some of the world’s largest pension funds and institutional investors, and has more than 380 associates in Europe, the Americas and Asia.

In the US investment advisory and investment consulting services are provided by Watson Wyatt Investment Consulting, Inc., which is a subsidiary of Watson Wyatt Worldwide Inc. Watson Wyatt Investment Consulting, Inc., is a registered investment adviser with the Securities and Exchange Commission.

About Watson Wyatt
Watson Wyatt (NYSE: WW) is the trusted business partner to the world''''s leading organisations on people and financial issues. The firm’s global services include: managing the cost and effectiveness of employee benefit programmes; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 6,000 associates in 30 countries and is located on the Web at www.watsonwyatt.com.

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¹Measured in US dollars.
²Dependency ratios: the ratio of the economically dependent part of the population to the productive part.
³Liabilities can be measured on a number of different bases. In the report we used long Government bond discount rates to make global comparisons easier. These figures will not coincide with measures used in accounting where AA bonds are generally used, or the measures used for funding purposes where rates usually take some account of the expected returns from equities.