South Africa’s pension funds are significantly overweight in their equity allocations relative to peers in Latin America, the Middle East, Africa and Asia. This is according to Mercer’s latest survey of how pension funds across 16 countries are allocating their assets.

The South African pension funds in Mercer’s study, accounting for a total of $158 billion (R2.25 trillion) in assets under management, have a weighted average asset allocation to equity of 58.3%. This is the second-highest of any country in the survey, with only Hong Kong being more overweight at 60%. 

South Africa’s allocation to equity is slightly down from 60.5% last year, but still well above the average allocation to equity across all countries of 36.1%.

Local allocators are also increasingly making use of their offshore allowance. This year, 23.1% of equity allocations were offshore. This is up from 19% in 2020.

Bonds

Most of the overweight to equity in local pension funds is funded by South African allocators being underweight fixed income.

The average allocation to fixed income across all countries is 50.9%. Pension funds in 13 of the 16 countries surveyed have higher allocations to fixed income than equity. Most notably, India’s pension funds carry a weighted average asset allocation to fixed income of 90%.

The weighted average asset allocation to fixed income in South Africa is nearly a third of that, at 33.2%.

South African pension funds are also slightly underweight alternatives, with a weighted average asset allocation to this space of 3.6%. Across all countries, it is 4.2%.

Some countries carry significantly higher allocations to alternatives. The largest exposures are in Peru at 16.3%, and South Korea at 11.4%.

“Balanced managers proliferate in the South African market, with trustees preferring to delegate asset allocation decisions to asset managers,” Mercer noted in the report. “On the whole, the pace of uptake of private markets and hedge funds has been slow. However, as certain funds grow, providers have been able to increasingly add to alternatives.”

There has been a slight increase in alternative allocations since 2013, when the survey was first conducted (marked as ‘inaugural year’ below), although it stagnated over the past year. Mercer does however anticipate further growth.

South African pension fund asset allocation

“Liquidity will remain a constraint in a largely defined-contribution pension fund market, but allocations to alternatives are expected to continue to increase as investors seek diversification away from equities into other growth assets to meet the high-return targets expected by local investors.”