Letter from our CEO
2023 was a tough year. With the vast majority of data collected, cleaned and loaded…what did we learn?
For the calendar year ending last December, we have collected more than 90% of the US $14 trillion in investment data expected. Concurrently, we have amassed pension administration service and cost data for plans that represent more than 50 million members and beneficiaries globally.
All major global pensions market – American, Australian, Canadian, Dutch, Middle Eastern, Nordic, and UK – are well represented. We also continue to have strong plan type (DB, DC), size and operating model diversification.
Let’s start with investments, where the average net value added in our investments database was negative (by ~140 bps) for the first time in a decade with almost 80% of funds delivering an NVA below zero. As a reminder, net value added (“NVA”) is gross returns less all costs and then relative to the chosen benchmark. This brought the ten-year average NVA (18 bps) closer in-line with the average since CEM’s inception in 1992 (i.e.,17 bps).
The main culprit? Private markets. More specifically, it is the NVA in private equity (materially negative) and real assets (modestly negative). This was amplified by the fact that private market investment has increased from 12% of AUM in 2014 to 24% in 2023. By the way, public markets had a strong year in terms of beta but were unable to generate positive NVA to offset private markets.
When we revert to a ten-year view, 2023 allowed many cohorts such as the Maple Middle (i.e., Canadian funds with C$5B to C$30B in AUM), large U.S. public and continental European funds to close the legacy NVA disparity to the historically strong Maple 8.
We have also been examining ten-year NVA trends at an investor level. To enjoy a positive NVA over the past decade, an investor benefitted from active management in most asset classes. Interestingly, over the decade, we saw U.S. DC plan participants actually get less access to active investment options. For example, in 2014, 14% of U.S. DC plans offered passive equity options to their members. In 2023 this number increased to 25%.
For Pension Administration, we also prefer a ten-year view. On this basis, we are seeing:
- Two-thirds of plans have decreased their business-as-usual costs, after adjusting for inflation. The average plan has decreased costs by 0.4% each year.
- In the meantime, 89% of plans have improved their service score, with an average annual increase of 1.5% each year.
- Greater digitalization enables plans to improve service levels while reducing costs. In 2023, 80% of a typical plan’s membership engages with them via their secure website. Twenty years ago, fewer than 50% of plans had a secure website.
Before closing this letter, would like to share:
Thanks, as always, for reading.
Rashay
