Assets of the world’s top 300 retirement plans increased by 10% in 2023 to a total $22.64 trillion, staging a recovery from their 12.9% decline in 2022, according to the according to the latest annual survey by Pensions & Investments and Willis Towers Watson PLC’s Thinking Ahead Institute.

The plans benefited from the recovery of markets, which have picked up momentum and generally did better in 2023, said Jessica Gao, London-based director at the Thinking Ahead Institute. “But we still have interest-rate pressure so funds are working hard to look for that extra return,” she said. The survey covers asset owners including public and corporate pension funds, defined contribution plans and state-owned pension funds and features data up until Dec. 31.

The top 20 retirement funds outperformed the top 300 plans, with growth at 11.6%. The 20 largest plans also grew as a percentage of total assets, to 42.1%, compared with 2022’s 41.5%.

European plans in the top 20 ranking performed best among the regions, with assets increasing by 18.6% in 2023 to account for 25.2% of the top 20 funds, while Asia-Pacific funds grew 10% and U.S. funds grew 8.3%.

The share of U.S. funds in the top 20 fell to 25.4% from 26.1% the year prior and the share of Asia-Pacific funds in the top 20 fell to 42.5% from 43.1%.

The MSCI All Country World index saw 22.8% returns in 2023 as both emerging and developed markets had positive returns of 10.3% and 24.4%, respectively.

But while market performance contributed positively to retirement plans’ asset growth in 2023, executives remain concerned for the outlook. More than half of the top 20 plans in their annual reports voiced concern over high inflation in the global economy, geopolitical tensions and the resulting rise in interest rates and global uncertainty.

“Volatility of the financial landscape remains. The impact of high inflation and high interest rates create both uncertainty and opportunities for the fund. Nevertheless, it’s essential to remember that as a long-term investor we prepare for these market fluctuations over the course of several decades,” California Public Employees’ Retirement System, Sacramento, was quoted as saying in the report. CalPERS had $452.5 billion in assets as of Dec. 31.

Around half of the top funds also reaffirmed their commitment to sustainable and responsible investment by implementing best practices in corporate governance.

“Climate risk management is a priority for responsible investment, and in 2023 Norges Bank published sharpened expectations for how companies should manage climate risk and views on the use of voluntary carbon credits. A number of companies in the portfolio committed to net-zero carbon emissions during the year,” Norway’s Government Pension Fund Global, Oslo, was quoted as saying.

The top spot in the ranking remained the Government Pension Investment Fund of Japan, Tokyo, which had $1.59 trillion in assets as of Dec. 31, followed by Norway’s GPFG with $1.58 trillion.

However, GPIF fell out of the top spot briefly in July when the yen sank to a 38-year low against the dollar. The yen has since recovered to around ¥148 per dollar as of Aug. 19, compared with the ¥160 range in July.

Considering how close in numbers the Japanese and Norwegian funds are, and the growing strength of the U.S. dollar, the number one spot could be contested in the future, Gao said.

The top 20 rankings also had a new entrant, as Taiwan’s Labor Pension Fund, Taipei, reached $176.3 billion in assets as of Dec. 31, edging out India’s Employees’ Provident Fund, New Delhi, with an estimated $176.2 billion in assets.

The Labor Pension Fund posted record gains driven by local market returns that benefited from the artificial intelligence boom, Gao noted. The fund gained NT$478.5 billion ($14.9 billion) from a 12.6% return on investment in 2023, according to data released by Taiwan’s Bureau of Labor Funds.

The plans did not make significant changes to their asset allocation across regions, although Gao noted that the large pension funds continue to look to invest more in the alternative space.

European and Asian plans had a stronger preference for bonds, while North American funds preferred equities, the study found. For instance, the weighted average allocation to bonds among top 300 European funds was 47.3%, 39.2% to equities and 13.5% to alternatives and cash.

“Europe traditionally is a large (defined benefit)-based area, and a lot of the defined benefit funds have asset-liability matching. So traditionally they would invest in bonds,” Gao said.

Similarly, Asia-Pacific funds also had a preference for bonds. Asset allocation to bonds was 48.7%, 40% to equities and 11.3% to alternatives and cash, the study found.

North American funds, however, had a majority of their portfolio allocated to equities at 48.3%, followed by 29.3% to alternatives and cash, and 22.4% to bonds.

Even though plans did not make significant changes to their asset allocation, Gao said that they are adjusting their approach to asset allocation, moving to a total portfolio approach from strategic asset allocation to increase fund resilience and improve overall risk management.

Total portfolio approach refers to a more dynamic method of asset allocation that measures performance against fund goals as opposed to benchmarks and making investment decisions based principally on risk factors rather than asset classes.

A previous Global Asset Owner Peer Study by the Thinking Ahead Institute found that the 10-year annualized real net return of total-portfolio-approach adopters produced 1.8% higher performance per annum, Gao said.

DB funds continued to dominate the share of assets in Europe, North America and Asia-Pacific, albeit to a diminishing extent. DB fund assets made up 60.8% of the total assets of the top 300 funds, down from 62.2% in 2022 and 63.5% in 2021. DB fund assets rose by 6.8% in 2023 from the year before.

Defined contribution plan assets rose 15.3% to account for 26.4% of top 300 assets in 2023, up from 25% a year ago. Reserve fund assets also increased 10% in 2023 to make up 11.9% of total fund assets compared with 11.8% in 2022. The remainder was in hybrid plans.

“There’s an obvious trend of DB going down and DC going up, and we’re especially going to see that in the next year with the Netherlands pension reform,” Gao said.

“The Netherlands traditionally have the majority of (pension funds) classified as DB but now because of the pension reform, the Netherlands are switching to a DC format. So that is something that will (lead to) a big swing on the DB-DC split,” she said.

The new pension rules came into effect in July, mandating that all future pension payments must follow a DC plan, and that providers must complete the transition by January 2028.

In Europe, 45.8% of funds are DB, 12.8% are DC, 36.9% are reserve funds and 4.6% are a hybrid. In Asia-Pacific, 62.5% are DB, 29.1% are DC, and 8.4% are reserve funds.

North America had the largest share of DB funds at 72%, followed by 28% in DC.

In Latin America and Africa, most funds (68.3%) are DC, 16.8% are DB and 14.9% are reserve funds.