Chapter

Foreign Investments of Pension Funds in Six Countries

Author(s):
International Monetary Fund
Published Date:
June 1992
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Author(s)
Lorna M. Dailey and John Motala 

Throughout the 1980s the scale of cross-border securities transactions, mostly among industrial countries, expanded sharply, with financial institutions playing an increasingly important role in the upsurge. According to a study by the Bank for International Settlements, 1 three factors have contributed to the expansion of institutional investment in foreign assets:

  • —a channeling of household savings to institutional investors and away from ordinary bank accounts (as the demand for insurance and pension schemes rose);

  • —a rise in the ratio of private sector wealth to GNP, as the prices of equity, real estate, and other assets have risen. The combined effect of this and the switch into institutional investment has led to an enormous increase in investment funds; and

  • —a massive diversification into foreign assets by institutional investors.

The enhanced role of institutional investors in international securities markets has increased the need to capture their transactions in balance of payments statistics, but the investigations of the Working Party on the Measurement of International Capital Flows suggested that coverage may be inadequate in some important countries. Part of the difficulty is that investors such as pension funds, insurance companies, and investment trusts often deal directly in foreign markets rather than through domestic banks or other financial intermediaries, which are the usual source of information for statistics on cross-border securities transactions. Under these conditions, national balance of payments compilers should take steps to ensure that their statistical collection system accounts for the cross- border transactions of domestic institutional investors.

Lorna M. Dailey served as a consultant to the Working Party and owns and manages Bedford Research Consultants in Falls Church, Virginia. The company is a research and information services firm, specializing in employee benefits issues. John Motala was a member of the technical staff and is now an Economist with the IMF’s Statistics Department.

Pension Funds as Investors

Pension funds are one important type of institutional investor. This paper analyzes the foreign investments of pension funds in the six countries—Australia, Canada, Japan, the Netherlands, the United Kingdom, and the United States—that account for the largest amount of such investment.

Only noninsured (trusteed) pension funds are included in this analysis, because the assets of insured pension plans are usually invested by the insurance companies along with their general reserves. (Whether foreign securities acquired by insurance companies are adequately covered is another aspect of this general problem.) In Japan, about 40 percent of all pension assets are managed by insurance companies. To be consistent with data for the other countries, only the pension assets managed by trust banks in Japan are included in this paper. Pension funds in both the private and public sectors are included for all countries.

Countries excluded from this survey but with substantial private pension systems are Switzerland, Germany, and France. The foreign investments of pension funds in Germany and France are considerably smaller than in the six countries listed above. Switzerland was excluded because the available data on pension funds did not separately identify trusteed and insured assets. Total Swiss pension assets were about Sw F215 billion ($166 billion) in 1990. No official data exist on the foreign investments of Swiss pension funds, but the estimated share is about 5 percent of total assets. In Germany, pension funds held assets of about DM 83 billion ($55 billion) in 1990, but no official data are published on their foreign investments; the estimated share is about 4 percent of total assets. The Complementary Pension System in France uses a modified form of pay-as-go financing. Only a small amount of its pension funds is thought to be invested in foreign securities.

Total assets of trusteed pension funds in the six countries under review were more than $3,700 billion at the end of 1990 (Table 1), about four times larger than in 1980. Total investment in foreign stocks and bonds by these funds was estimated to be $235 billion, but growth in the foreign securities component of pension fund holdings has been much more dramatic, rising by almost 1,300 percent, from less than $17 billion in 1980. In each of the six countries, foreign investments grew significantly faster than total trusteed pension assets. About 45 percent of these foreign securities were held by pension funds in the United Kingdom, even though assets of U.K. pension funds represented only 16 percent of the total pension fund assets of the six countries.

Table 1.Assets Held by Pension Funds in Selected Countries, Year-end 1990(In billions of U.S. dollars)
Total assetsForeign securities
Australia55.57.4
Canada198.0113.51
Japan161.624.21
Netherlands230.427.42
United Kingdom591,1105.0
United States2,500.0157.51
Total3.736.6235.0
Source: Prepared by Bedford Research Consultants. ‘Estimated.

Estimated.

includes private placements.

Source: Prepared by Bedford Research Consultants. ‘Estimated.

Estimated.

includes private placements.

Total investment in foreign stocks by trusteed pension funds was estimated at $179 billion at the end of 1990, over half of which was held by the United Kingdom (Table 2). Holdings of foreign bonds were estimated at $56 billion. Japanese funds accounted for over 40 percent of the bond holdings, although the figures may include some foreign stocks that cannot be separately identified. As noted earlier, the Japanese data cover only pension assets managed by the trust banks.

Table 2.Foreign Securities Held by Pension Funds in Selected Countries, Year-end 1990(In billions of U.S. dollars)
StocksBonds
AmountPercent of totalAmountPercent of total
Australia17.44.1n.a.
Canada12.126.81.522.7
Japan1n.a.24.2243.4
Netherlands16.79.310.819.3
United Kingdom94.552.710.518.8
United States48.6327.18.8315.8
Total179.3100.055.8100.0
Source: Prepared by Bedford Research Consultants.
Source: Prepared by Bedford Research Consultants.

The 20 largest pension funds in the six countries, ranked in Table 3 by the approximate size of their foreign investments at the end of 1990, accounted for more than 20 percent of the total foreign investments of all trusteed pension funds in the six countries. The rankings should be considered approximate as the data were estimated from a variety of sources and may not be precisely equivalent.

Table 3.Pension Funds Ranked by Size of Foreign Investments, Year-end 1990(In billions of U.S. dollars, unless otherwise noted)
Pension fundTotal foreign
Rank or plan sponsorCountry1investments2
1.California Public
EmployeesUnited Slates5.7
2.British CoalUnited Kingdom4.3
3.TIAA-CREFUnited States4.2
4.Algemeen Burgerlijk
Pensioenfonds (ABP)Netherlands4.2
5.RG.G.M,Netherlands3.4
6.Electricity SupplyUnited Kingdom3.3
7.British RailwaysUnited Kingdom3.2
8.ShellNetherlands2.5
9.British TelecomUnited Kingdom2.3
10.PhilipsNetherlands2.2
11.GTEUnited Slates1.9
12.AT&TUnited Slates1.9
13.British GasUnited Kingdom1.9
14.Barclays BankUnited Kingdom1.8
15.British AirwaysUnited Kingdom1.8
16.Québec Pension PlanCanada1.83
17.British PetroleumUnited Kingdom1.7
18.General ElectricUnited States1.6
19.Pacific Teles isUnited States1.6
20.Post OfficeUnited Kingdom1.5
Total foreign investments of top 20 funds52.8
Foreign investments of top 20 funds as a
percentage of total foreign investments of
trusteed pension funds in the six countries22.5
Pensions and Investments, January 21 and August 5, 1991. Global Investor, June 1991 and November 1990, Prepared by Bedford Research Consultants.

Several international organizations based in the United States, notably the United Nations, have pension funds with large holdings

Pensions and Investments, January 21 and August 5, 1991. Global Investor, June 1991 and November 1990, Prepared by Bedford Research Consultants.

Several international organizations based in the United States, notably the United Nations, have pension funds with large holdings

Among the top 20 pension funds ranked by size of foreign investments, 9 are located in the United Kingdom, 6 in the United States, 4 in the Netherlands, and 1 in Canada. The largest fund (California Public Employees) and the fourth largest (ABP) are for government employees. The sixteenth largest fund (Quebec Pension Plan) is a fund managed by the provincial government in Quebec for the residents of Québec, equivalent to the Canada Pension Plan in other provinces. The third largest fund (TIAA-CREF) is for college and university professors and staff. The fifth (P.G.G.M.) is an industry-wide pension fund for health care workers. Eight of the nine U.K. pension funds

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