Amidst a “crisis of unprecedented proportions,”  pension funds will try to push up returns by diversifying across geographies and asset classes.

A report from the Association of the Luxembourg Fund Industry said that pension funds are “facing a crisis of unprecedented proportions” due to rising life expectancies in many countries.

As a result, they have been forced to diversify across geographies and different asset classes in a bid to push up returns.

Nevertheless, global pension fund assets will likely grow from $ 42.2 trillion in 2018 to $ 61.1 trillion in 2025, reflecting a CAGR of 5.4%, the report said, according to Chief Investment Officer.

Equities lose ground to alternatives

Though equities still account for 38% of total pension assets as a end of 2018, they’re substantially down from the 60% they were in 1998. Equities’ loss has been alternative investments, says the report, due to the funds’ need for higher alpha.

“In light of the current global investment environment, pension funds, with their ability to weather periods of market instability, are also upping their allocations to alternatives, including notably illiquid assets such as private equity and infrastructure,” Oliver Weber, head of asset and wealth management, PwC Luxembourg, said in a statement.

Alternative assets comprised 27% of assets in 2018 up marginally from 26% in 2014. However, in absolute terms, alternatives have grown from $ 9.2 trillion to $ 11.6 trillion in that same period.

Sustainable investments too gain ground

Another interesting finding from the report is that investments by pension funds in sustainable assets grew by 34% in the two years to the end of 2018. The report said that investors were increasingly environmentally conscious and were looking for strong returns as well as a better impact.

Pension funds spread their wings

In the drive for return, pension funds have had to look outwards to foreign exposure. This move gives them access to “thriving markets” that help to increase returns and reduce portfolio volatility. Such investing also helps to counter local company and sector risks, the report said. Nevertheless, North America still accounts for the lion’s share – 61% – of their assets as at end 2018.

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