Global pension fund assets recovered in 2009, but they are still below 2007 levels, according to a new study from Towers Watson.

The firm reports that pension assets in the 13 biggest markets increased by 15% in 2009, from US$20 trillion to more than US$23 trillion, which brings assets back to 2006 levels.

Canada clocks in as the fourth biggest pension market with over US$1.2 trillion in assets, trailing the U.S. (US$13.2 trillion), Japan (US$3.2 trillion), and the UK (US$1.8 trillion). The Canadian pension market now represents over 5% of global assets, up from 4% in 1999, it reports.

Over the past year, Canadian pension assets grew 13%, in local currency terms, well above the 10-year average annual growth rate of 3.1%, and the five-year average 8.0%. In U.S. dollar terms, the Canadian growth rate is 31.2% over the past year, versus a 6.4% 10-year average. On average global pension assets (measured in local currency) grew by over 16% in 2009, compared with an 11% fall in 2008, improving the 10-year average growth rate to almost 7%.

The study also noted that Canada is the only major country where defined contribution assets have fallen compared to defined benefit assets over the past 10 years — DC assets are just 3% of total assets, down from 13% in 2004. Canada is also among the countries with the highest proportion of public sector plan assets, 62%, versus just 35% for the seven largest pension markets (only Japan has a higher share in the public sector at 70%).

It also reported that, as a percentage of GDP, the Canadian pension market is down to 84% from 97% in 1999. The only country to see a bigger drop in that period was the U.S., which dropped 16 percentage points over the same period. Still, that remains above the world total of 70%, down from 76% in 1999.

The research also found that the average plan is about 54% in equities, 27% bonds, 1.3% cash, and over 17% “other” assets. The asset mix for Canada is 49% equities, 26% bonds, 2% cash and 22% “other”.

“The global financial crisis was a huge wake-up call and problems of poor systemic design in the industry point to increased likelihoods of further periods of financial distress in future. While the recovery of markets will be welcomed, it is hoped that it will not stifle recognition of these as major issues for governments and companies to address. I fear that without exceptional leadership we will have another tough decade in the pension and investment world,” said Carl Hess, global director of investment at Towers Watson.

“Highly changeable market conditions in short periods of time will have caused serious disruptions for pension funds,” he added. “In order to get back on track, they will be reviewing all options, including extra contributions from sponsors, contingent funding arrangements, investment strategy reviews, hedging strategies and pension insurance buy-ins, not to mention changes to benefits structures including fund closures.”

“As a result of the crisis there is a heightened awareness of the need to be better prepared in future and to think differently about how markets can be buffeted by extreme events,” said Hess. “An important characteristic of this new environment is the acknowledgement by asset owners of much increased complexity and the recognition that the appropriate governance for a chosen investment strategy is critical. This will increasingly lead investors to either prioritizing higher governance and allocate proportionate resources or simplifying their investment strategies to minimize cost and avoid value destruction. This will become all the more important as pensions and financial services regulators seek to spell out what governance standards funds should adhere to and their broader responsibilities. Funds in the past have had a very light touch applied on these issues, but the massive size and sphere of their influence make pension funds ripe for greater regulatory influence.”

IE