This section examines how the growth in assets in 2023 fits with longer term trends and analyses the drivers of these long-term trends.
Pension Markets in Focus 2024
Abstract
Saving for retirement is for the long-term. It is therefore essential to look at developments in assets for retirement over a longer period than two years.
This section aims to examine how growth in assets in 2023 fits with longer term trends and analyse the drivers of these long-term trends.
This section first examines the growth in assets over the last two decades. It then looks at how the returns on investments of pension providers and public pension reserve funds have contributed to the long-term asset growth. It finally shows that the positive cashflow of contributions over expenditure also underpins the long-term growth in assets.
Assets earmarked for retirement in the OECD area have more than tripled in USD current prices over the past two decades, despite fluctuations such as those seen in 2022-23. Pension systems have faced multiple events that led to losses in financial markets and a drop in total assets, such as the 2008 financial crisis or the COVID-19 outbreak in early 2020. Nevertheless, assets for retirement in the OECD area have consistently rebounded (Figure 3.1).
In USD trillion
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and other sources.
Assets have grown in all reporting jurisdictions over the last two decades, or since the beginning of the reporting period, despite several crises. Table 3.1 shows the average nominal growth rate of assets in 2023 and annually over the last 5, 10, 15 and 20 years up to end-2023. Over the last 15-20 years, the rise in assets has been the strongest among the countries that introduced their asset-backed pension system recently, such as Estonia, Latvia and Türkiye. However, it slowed down over the last five years in the first two, due to the investment losses in 2022, a maturing system with fewer new members joining (e.g. Latvia) or the recent option of withdrawing assets from the system (e.g. Estonia). Likewise, many non-OECD jurisdictions with recent systems recorded an average annual growth rate as strong or stronger than OECD countries (e.g. several other European and African countries). More mature systems had a lower long-term growth rate (e.g. United Kingdom and United States, between 5% and 6% per year on average over the last two decades).
In per cent
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics.
Trends in assets differ among public pension reserve funds. Some reserve funds have seen a decline over the long term, such as in France (FRR over the last 15 years), Spain (over the last 20 years) and the United States (over the last 10 years), with a depletion of their reserves (Table 3.2). Spain recently decided to reverse course and to replenish its reserve fund, which explains the positive average growth rate over the more recent period.
In per cent
Source: OECD Global Pension Statistics and websites of public pension reserve funds.
Pension providers and public pension reserve funds have achieved investment gains over the long-term, contributing to the nominal growth of assets earmarked for retirement. Pension providers have managed to record positive average nominal rates of return over the last 10, 15 and 20 years in all reporting jurisdictions (Table 3.3). Average nominal rates of return are also positive over the last five years, despite large investment losses in 2022 in some countries (e.g. Netherlands). Türkiye has the highest average nominal rates of return over the last 5, 10 and 15 years, driven by large price increases in the financial instruments pension providers hold. Likewise, most public pension reserve funds have earned a positive investment income over the last two decades, which has a been a source of financing of reserves for the public PAYG arrangements.
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.
Pension providers in Latin America recorded the largest average rates of return in real terms over the long-term. Pension providers in Colombia had an average annual real rate of return of 4.6% over the last 20 years, the highest among those with available data. Pension providers in Costa Rica, the Dominican Republic and Uruguay had among the highest real rates of return over the last 15 years, above 5%. Real investment returns tended to be lower during more recent periods in Latin American countries. Mesa-Lago (2021[13]) argues that the decline in investment returns may be partly due to a reduction in interest rates, given that bonds account for a significant percentage of investments of pension providers.1
By contrast, the lowest average real rates of return were recorded mostly in Europe and Türkiye where pension providers had a conservative asset allocation or were facing high inflation. Pension providers recorded investment losses in real terms in Czechia, the Slovak Republic and Türkiye over the last 15 years, and in Bulgaria, Czechia, Estonia and Latvia over the last 20 years. The relatively conservative asset allocation in these countries may have contributed to these losses in real terms in the long run, as pension providers earned lower returns than others when stock markets were performing strongly.2 The large losses that pension providers incurred in 2022, also on bond holdings, further exacerbated these losses over the long-term.3 Inflation has also been higher in some of these countries (e.g. Estonia, Türkiye) than in others for some years, requiring higher returns in nominal terms to catch up with inflation.4
Likewise, public pension reserve funds that invested mostly in bonds have earned a lower investment income over the long term than others with a more diversified portfolio. Reserve funds with more diversified portfolios achieved the largest investment gains. Public pension reserve funds recorded a real investment rate of return above 5% per year on average over the last 20 years in Canada, Norway, Sweden (AP3, AP4 and AP6) and New Zealand. Japan’s GPIF recorded an average annual real investment rate of return close to 5% over the last 20 years and above 5% in the last 15 years. These funds have had a more diversified portfolio than others, such as the public pension reserve funds in Spain and the United States that hold only government bonds and had an average return just slightly above inflation over the last 20 years.
Pension providers had been looking for higher yielding instruments than bonds when interest rates were falling in the last decades. Figure 3.2 shows the average asset allocation of pension providers in 15 jurisdictions over 2001-23. Figure 3.2 shows that the proportion of assets invested in bonds has been falling over the last two decades, with a temporary spike in 2008 as a result of a sharp fall in equity valuations. By contrast, pension providers have increased their exposure to equities and in alternative investments. Pension providers in Latin America have started investing in alternative assets over the last decades.5 In the United Kingdom, the low interest rate environment and low returns have led larger pension schemes to look at alternative investments such as hedge funds and private equity (PPI, 2024[14]). Some have been increasing their exposure to foreign assets (e.g. Chile, Peru and some European countries with small capital markets) in search of potentially higher risk-adjusted returns. Public pension reserve funds in Korea and Japan have also sought to further diversify their asset allocation to achieve higher returns (OECD, 2022[15]; OECD, 2021[9]).
As a percentage of total investment
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics.
Policy makers have encouraged the diversification of the asset allocation of pension providers by loosening investment regulations. For example, Estonia and Latvia raised the investment limit in equities from 75% to 100% in 2019 and 2021 respectively (OECD, 2024[16]), which may have contributed to the rise in the proportion of assets invested in equities by pension providers in these two countries.6 Peru has also progressively lifted investment regulations on foreign investments to allow pension providers to seek investment gains abroad. Some countries have also encouraged investing in alternative investments by removing barriers for investments and allowing these investments or increasing the limits (e.g. in Czechia, Colombia, Switzerland). For example, Czechia passed a law in 2023 allowing pension management companies to establish alternative funds that can invest in alternative assets such as private equity funds, real estate and start-ups.
The change in default investment strategies may also have played a role in the reduction in bond holdings in the investment portfolio of pension providers. Members of defined contribution pension plans can usually decide the ways in which their assets are invested. Default investment strategies are for those unwilling or unable to make a choice. Policy makers have favoured less conservative investment strategies by making people default into investment allocations with more growth assets (e.g. Croatia in 2019 and New Zealand in 2021),7 or moving away from a fixed asset allocation towards life cycle asset allocation, for example. Lithuania, the Slovak Republic and Slovenia, for example, have established life-cycle funds where members’ assets are more exposed to higher-risk higher-return assets in their youth (e.g. in 2019 in Lithuania, in 2023 in the Slovak Republic and in 2016 in Slovenia for voluntary pension insurance). The share invested in equities has grown in Croatia, Lithuania and New Zealand.8 The share in bonds has declined in the Slovak Republic and Slovenia, but the proportion of assets in equities remains relatively small.9
The rise in interest rates had led to a renewed focus in government bonds in several countries, such as in Bulgaria and Colombia, reversing the decline in bond holdings (since 2019 in Bulgaria, 2018 in Colombia).10 The largest reallocation towards bonds occurred in Colombia between 2022 and 2023 (by 12 percentage points). Pension providers in Colombia increased their exposure to fixed-income securities linked to inflation, as this asset class was generating more alpha.
A positive cashflow of contributions over benefits and other expenditure also underpinned the growth of assets earmarked for retirement in recent years. Contributions exceeded benefits and other expenditure, with a positive average annual cash flow in most jurisdictions over the last 5 to 20 years (Table 3.4).
As % of assets at end-2023
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics.
Growing pension contributions are one of the factors behind the positive cashflow of pension providers over the years. Most reporting jurisdictions recorded a nominal growth of contributions paid over the last 5, 10, 15 and 20 years (Table 3.5).11 Albania, Latvia, North Macedonia and Romania experienced some of the largest excesses of contributions over benefits and other expenditure and also had some of the largest growth rates of contributions over the last 10 years or more. The few exceptions where contributions declined include countries that transferred the assets of some asset-backed pension arrangements to the public pension system, such as Hungary (in 2011), Poland (in 2014) and Portugal (for a pension fund in 2023). These countries therefore tend to have negative cashflows over periods covering these reforms, with a reduction in contributions and an increase in expenditure from transfers. Contributions started growing again following the change in the system such as in Hungary and Poland, with a positive nominal growth in assets over the last 10 years.
In per cent
Source: OECD Global Pension Statistics.
Increases in contributions have several explanations. These include an increase in the proportion of people participating in a pension plan, developments in labour markets and changes in contribution rates.
In some countries, the growth in contributions comes from an increase in the proportion of people participating in a pension plan. Countries with the largest increases in contributions are those where the proportion of people participating in a pension plan has increased significantly, such as in Armenia, Bulgaria, Estonia, Latvia and New Zealand (Figure 3.3). The common feature of all these countries is that they introduced mandatory pension arrangements or automatic enrolment programmes.
As a % of the working-age population
Note: For more details, please see the methodological notes in Annex C.
Source: OECD Global Pension Statistics and other sources.
Participation has increased in most types of pension plans. This growth was more moderate in voluntary arrangements. Countries have tried to encourage participation in a pension plan by introducing mandatory plans (e.g. Greece) or automatic enrolment programmes (e.g. New Zealand, Poland, Türkiye, the United Kingdom), expanding the base of people eligible for a plan (e.g. Australia, Norway), facilitating the set-up of plans by employers (e.g. Spain), reducing the burden for employers to set up a plan (e.g. in the United States) and designing plans targeting a specific population (e.g. informal workers in several African countries). Countries have also used financial incentives and communication campaigns to encourage people to contribute.
Developments in labour markets and wage growth also influence participation and contributions to pension plans. A higher proportion of people working improves the access of the working-age population to workplace pension arrangements. Contributions also rise mechanically when they are a fixed percentage of the salary and salaries increase. Improvement in employment rates after COVID-19 is likely to have contributed to the increase in the number of people participating in a pension plan and in contributions. The rise in nominal wages, recently driven to some extent by inflation, also contributed to the rise in contributions in nominal terms. Rises in inflation led to faster growth in contributions over the last 5 years than over the last 10, 15 and 20 years, such as in Türkiye.
Several countries increased contribution rates, leading to a rise in contributions. For example, Australia has been increasing the mandatory contribution rate for employers by 0.5 percentage point every year since 2021 (to reach 12% in 2025),12 which may explain the acceleration of the growth in pension contributions in recent years. In New Zealand, the minimum contribution rates to KiwiSaver plans rose from 2% to 3% of gross salary for both employees and employers in 2013. The United Kingdom increased the minimum contribution rates in occupational plans with automatic enrolment from 1% to 2% of qualifying earnings for employers and from 1% to 3% for employees in 2018, and then to 3% for employers and 5% for employees in 2019. Mexico also decided in 2020 to increase mandatory employer contributions and adjusted government contributions starting from 2023. Türkiye recently raised the state matching contributions from 25% to 30% for people joining the individual pension system.
Benefits have also increased in many jurisdictions but the cashflows of contributions over benefit payments remain positive over the long-term except in a few cases. Negative cashflows in Table 3.4 may have different causes: the maturity of the system with benefit payments exceeding contributions for years (e.g. Canada, Finland, United Kingdom), early withdrawals during COVID-19 (e.g. Chile, Peru), change in the rules on contributions (e.g. Estonia)13 and transfer of assets to the public PAYG system (e.g. Hungary, Poland, Portugal).
← 2. In Estonia, the proportion invested in equities only rose recently, which may be due to the lifting of investment regulations on equity investments in 2019. The proportion in equities also increased over the years in Latvia, from 19% of assets at end-2015 to 51% at end-2023.
← 3. The real investment rate of return of pension providers was -23.3% in Bulgaria in 2022, -13.3 in Czechia, -22.8% in Estonia, -29.7% in Latvia, -22.5% in the Slovak Republic.
← 5. See Preqin | Alternative Assets Data, Solutions and Insights and What Latin American pension funds are looking for (privateequityinternational.com)
← 8. The proportion of assets invested in equities grew from 23% at end-2014 to 28% at end-2023 in Croatia, from 39% at end-2010 to 70% at end-2023 in Lithuania, from 27% at end-2014 to 43% at end-2023 in New Zealand. See Annex B for the full series.
← 9. The proportion of assets in bonds increased up to 2014 before declining afterwards in the Slovak Republic. The proportion of assets invested in bonds declined from 75% at end-2003 to 56% at end-2023 for all pension providers combined in Slovenia. In both countries, the proportion of assets in equities remained below 10% in nearly all years. See Annex B
← 13. The pension reform in 2021 in Estonia allowed members to apply for an exemption from making contributions to the second pillar. See Pensions in Estonia | EURAXESS