Major pension funds in Asia have been diversifying further into alternatives, driven by the need to deliver solid returns and combat inflationary pressures as they face a looming underfunding crisis. These are some of the findings from Cerulli Associates’ newly released report, Asian Retirement Markets 2023: Building Security Against Uncertainty.

Over the past decade, Asian pension funds have gradually diversified their portfolios overseas and into riskier assets such as equities and alternatives. This trend continues apace, as they mature and adopt more sophisticated investment strategies. In addition, the poor macroeconomic environment has put pressure on Asian pension funds, with major funds in markets such as Taiwan and Malaysia impacted by global market losses and contributions that have been unable to keep pace with benefit payouts.

More importantly, many Asian pensions have urgent needs for yields to meet their liabilities and support rapidly aging populations. For instance, Korea’s National Pension Service (NPS) is projected to run dry in 2055, and local industry observers have called for a more aggressive investment strategy, including overseas diversification, to help extend the scheme’s longevity.

Against this backdrop, most Asian pension schemes’ alternative investments have grown by double digits between 2018 and 2022. As a proportion of their portfolios, alternative allocations for major pension funds rose between 2020 and 2022. Growth was led by Korean pensions: the NPS’ alternative allocations grew 5.5 percentage points and the Korean Teachers’ Pension Fund’s rose 4.1 percentage points during the two-year period. In 2022, alternatives accounted for 10.1% of total retirement assets in the Asia-ex-Japan region, the highest seen for that asset class in since 2018.

The challenges faced by pension funds in alternatives investing are areas where asset managers can step in to provide their expertise. Nearly 41% of Asian pensions surveyed by Cerulli cite a “limited understanding” of alternatives, while one-third say they lack in-house expertise when investing in alternatives.

“While Asian pensions continue to boost their alternatives portfolios, it will likely take many more decades for them to build sufficient in-house expertise in the area. Hence, alternatives remain a greenfield for asset managers,” said Shaun Ng, analyst with Cerulli. “Managers seeking to win alternatives mandates from Asian pension funds should be able to source suitable deals, demonstrate a strong track record in specific alternative asset classes, and share knowledge with their clients.”