This section shows that asset-backed pension systems have not recovered the losses they suffered in 2022 and the level of assets in 2023 is not back to their 2021 level.
Pension Markets in Focus 2024
Abstract
This section aims to explore whether asset-backed pension systems had recovered the losses in 2022 and seen assets back to their 2021 level. The growth in assets in 2023 contrasts with its decline observed in 2022. The rise in interest rates in 2022 and falling equity valuations led to widespread investment losses in 2022 (OECD, 2023[12]). These losses led to a drop in the amount of assets earmarked for retirement, unseen since the 2008 financial crisis in most OECD countries.
Assets in 2023 were below their 2021 level in the OECD area. This decline was driven by the United States and other large European markets (e.g. Netherlands, United Kingdom) where pension providers have not recouped their investment losses from 2022. However, assets exceeded their 2021 level in most other jurisdictions as a result of investments gains and positive cashflows. In the case of public pension reserve funds, the cashflow of the largest reserve fund in the OECD (the US OASI Trust Fund) has been negative as the United States has been drawing on the reserves, explaining the shortfall in 2023 compared to 2021 in the OECD area.
This section first shows how assets for retirement in 2023 compare with their 2021 level in the OECD area. It then identifies the countries where pension providers and public pension reserve funds have not yet recovered their investment losses from 2022. It finally explores the cashflows of pension providers and public pension reserve funds between end-2021 and end-2023.
Assets earmarked for retirement at end-2023 remained 5% below their 2021 level in nominal terms in the OECD area. Assets of pension providers dropped from USD 59.7 trillion at end-2021 to USD 51 trillion at end-2022, as higher interest rates and falling equity valuations caused large investment losses among most pension providers (OECD, 2023[12]). The growth in assets in 2023 was insufficient to bring them back to their 2021 level in USD terms (USD 56.5 trillion at end-2023) (Figure 2.1). Likewise, assets in public pension reserve funds were down by 5% in nominal and USD terms compared to end-2021 (Figure 2.2).
In USD billion
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics.
In USD billion
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
The largest markets accounted for the largest shortfalls in the level of assets in nominal and USD terms in the OECD between 2021 and 2023. The eight largest pension markets account for over 90% of assets of pension providers. Pension providers in these eight markets had fewer assets in USD terms at end-2023 than at end-2021, except in Switzerland. Some of the largest public pension reserve funds also had lower reserves at end-2023 than at end-2021, including Australia’s Future Fund, Japan’s GPIF, Sweden’s AP Funds and the US OASI Trust Fund.
The lower level in assets in USD terms reflects changes in exchange rates between end-2021 and end-2023 in several countries. Assets decreased in USD terms but increased in national currency in some of the largest markets, including Australia and Japan (Figure 2.3). Similarly, the reserves of Australia’s Future Fund and Japan’s GPIF decreased in USD terms but increased in national currency. While the growth of Korea’s National Pension Fund is small in USD terms (0.5%), it is more significant in national currency (9.2%). By contrast, assets of the reserve fund and pension providers in Switzerland increased in USD terms but were the same at end-2023 as at end-2021 in national currency because of the depreciation of the US dollar against the Swiss franc.
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
Assets at end-2023 were above their 2021 level in national currency in most countries but the largest ones. The evolution of assets in national currency is more important than in USD at the level of a given country as retirement benefits will be paid in national currency. Assets of pension providers were higher in national currency at end-2023 than at end-2021 in just over two thirds of OECD countries. Exceptions include some of the largest pension markets, in particular Denmark (-4.9%), the Netherlands (-14.5%), the United Kingdom (-23.6%) and the United States (-3.2%). Likewise, reserves of public pension reserve funds at end-2023 were above their 2021 level in national currency in most OECD countries, except in Finland, France (FRR), Israel, Sweden and the United States.
Countries with the largest decline in assets between end-2021 and end-2023 were those where assets declined both in 2022 and in 2023. While assets declined in most OECD countries in 2022, they continued to decline through 2023 in Luxembourg and Portugal (Figure 1.2), which both recorded some of the largest drops in assets (Figure 2.4). Countries where the growth in assets in 2023 was insufficient to offset the drop in 2022 include: Austria, Canada, Denmark, Finland, Germany, Ireland, the Netherlands, Spain, the United Kingdom and the United States. In the case of public pension reserve funds, reserves of France’s FRR and the US OASI Trust Fund declined in 2022 and continued to do so in 2023. The increase in reserves was insufficient to offset the decline in 2022 in Finland, Israel and Sweden.
Reference: 2021 = 100
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
Assets of pension providers were higher at end-2023 than at end-2021 more often outside the OECD area than in the OECD area. This is to some extent because the decline in assets in 2022 was less common for pension providers in non-OECD jurisdictions than in OECD countries. The only non-OECD jurisdictions where assets declined between 2021 and 2023 were Liechtenstein (-2.2%), Hong Kong (China) (-7.4%) and Peru (-7.9%).
Pension providers and public pension reserve funds achieved positive average returns over the last two years, in nominal terms, except in some of the largest markets. Figure 2.5 shows the nominal rate of return in 2022, in 2023 and the break-even rate. The break-even rate is the rate at which investment gains (respectively losses) in a given year fully offset the losses (respectively wipe out the gains) of the previous year. For example, an investment return of 11.1% would have been necessary in 2023 to offset a -10% investment return in 2022 (i.e. 1/(1+(-10%))-1). Pension providers achieved a positive rate of return on average over the last two years when the investment rate of return in 2023 was above the break-even rate. This was the case in most jurisdictions except the United States and some of the largest European pension markets (e.g. the Netherlands, Switzerland, the United Kingdom). Likewise, some public pension reserve funds in Europe (e.g. Sweden (except AP3 and AP6), Finland’s Keva and France’s FRR) did not achieve an investment return high enough in 2023 to offset the investment losses of 2022.
The largest pension markets in Europe and the United States experienced some of the lowest returns in 2022, making it difficult for them to recoup all their 2022 losses. Most pension providers in the OECD area suffered losses on their bond and equity investments in 2022, due to interest rate increases and falling equity valuations. Pension providers in some of the largest pension markets in Europe also experienced losses in other financial instruments or vehicles such as real estate (e.g. Netherlands) and interest-rate derivatives (e.g. Netherlands, the United Kingdom) in 2022 (OECD, 2023[12]). Positive returns in 2023 from rising equity valuations were insufficient to offset the losses in the largest pension markets.
By contrast, pension providers in other jurisdictions incurred lower losses in 2022, which they recouped more rapidly with a few exceptions. Likewise, public pension reserve funds that had a better investment performance in 2022 than other funds fared better over the two years. For example, Sweden’s AP6 had a lower return than others in 2023 but made gains in 2022 and achieved profits over 2022-23, unlike most other AP funds.
In per cent
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
The positive cashflow of contributions over benefit payments and other expenditure supported the growth of assets earmarked for retirement over 2022-23. Pension providers recorded a positive cashflow over the period in most jurisdictions (Figure 2.6), adding another source of revenue. Likewise, public pension reserve funds in Canada, Costa Rica and Korea benefitted from an excess of contributions over benefits to the PAYG public system which complemented investment gains (Figure 2.7).
As a % of assets at end-2021
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics.
As a % of assets at end-2021
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
The positive cashflows from contributions over benefits and other expenditure offset investment losses in several jurisdictions, especially in European countries that recently phased in asset-backed pensions (e.g. Bulgaria, Greece, Latvia, Lithuania, Slovak Republic). These countries benefitted from a large excess of contributions over benefits and other expenditure (over 15% of assets at end-2021), which exceeded investment losses.1 The 2022 investment losses to offset were also relatively small in some of them (e.g. -8.7% in Greece, -8.1% in Malta) compared to more mature markets (-23.6% in the Netherlands, -19% in the United Kingdom). In the case of public pension reserve funds, the positive cashflows of the reserve funds of Chile, Spain and Switzerland offset the investment losses of these funds and brought the reserves to a higher level.
By contrast, the inflow of contributions was insufficient to offset investment losses in the United States and several European countries, in particular the largest European countries. The inflows of contributions exceeded benefits and expenditure in Austria and Liechtenstein but were not enough to take assets back to their 2021 level. Pension providers in some other European countries (Luxembourg, Spain, Portugal and the United Kingdom) even recorded a negative cashflow over 2022-23, which further reduced the amount of assets earmarked for retirement on top of the investment losses over 2022-23.
The negative cashflows that some mature countries experienced to finance benefits (e.g. Finland) reduced the amount of assets despite the positive investment income over the period 2022-23. For example, while pension providers in Finland managed to record a positive investment income in 2022 and 2023, assets declined due to higher payments and expenditure than contributions. Likewise, France (FRR), Finland, Sweden and the United States drew down their reserves to pay the benefits of the public PAYG systems, explaining the decline in assets of the public pension reserve funds despite the investment gains for some of them over the period 2022-23.
Early withdrawals as in the case of Peru offset the investment gains of pension providers over 2022-23. In Peru, members continued to benefit from the option of withdrawing their savings in 2022. In terms of cash flows, during 2022, pension providers in Peru lost the equivalent of 13.2% of assets at end-2021. The positive cashflow in 2023 and the slightly positive investment income over 2022-23 were not sufficient to reach the level of assets at end-2021.
← 1. The excess of contributions over benefits and other expenditure over 2022-2023 amounted to 18.7% of assets at end-2021 in Bulgaria, 20.3% in Greece, 19.6% in Latvia, 21.4% in Lithuania and 15.6% in the Slovak Republic.