The UK is the world's third largest pension market, having been overtaken by Japan in 2020, with assets totalling $3.6trn (£2.58trn), according to Willis Towers Watson (WTW).

The provider’s Thinking Ahead Group published the estimates for 2020 in its annual Global Pension Assets Study, which also stated that the UK pension market had recorded a compound growth rate of 4.6 per cent over the last decade.

The UK’s ratio of pension assets to gross domestic product (GDP) was shown to have increased to 135 per cent during 2020, with the global ratio having climbed by 11.2 per cent to a record high of 80 per cent as countries’ GDP was hit by the impact of the Covid-19 pandemic.

Defined benefit (DB) pensions dominated the UK market, accounting for 81 per cent of assets, although defined contribution (DC) pensions were shown to have become the planet’s dominant pension model as they accounted for 53 per cent of pension assets across the top seven markets (P7), up from 35 per cent in 2000.

The P7 consisted of Australia, Canada, Japan, the Netherlands, Switzerland, the UK and the US, with the US representing 62 per cent of worldwide pension assets and the UK representing 6.8 per cent.

Globally, DC assets grew by 8.2 per cent per annum over the last decade, above the 4.3 per cent growth achieved by DB assets in the same period.

Australia had the highest proportion of DC assets, with the model accounting for 86 per cent of its pension assets, while Japan and the Netherlands had 95 per cent and 94 per cent of their respective pension assets in DB form.

Additionally, out of the P7, the UK had the smallest allocation (8 per cent) to alternative assets such as real estate versus the average of 26 per cent, while its allocation to bonds and equities stood at 65 per cent and 26 per cent respectively.

This showed the UK bucking a global trend, as allocations to alternative assets had grown from just 7 per cent in 2000 to 26 per cent in 2020 across the P7, while equity allocations had dropped from 60 per cent to 43 per cent and bond allocations fell from 31 per cent to 29 per cent.

Thinking Ahead Institute co-head, Marisa Hall, said: “In what was a highly tumultuous year, pension funds continued to grow strongly in 2020, underpinned by ongoing multi-decade themes such as the rotation from equities to alternatives and the growth of DC, now the dominant global pensions model.

“This paints a picture of a resilient industry in good health and relatively well placed to weather the effects - economic and otherwise - of the ongoing pandemic. This is good news for billions of savers around the world.

“However, this shouldn’t mask the growing set of challenges that industry leaders face, particularly around addressing broader stakeholder groups’ needs and wants, while continuing to deliver financial security for their fund members.

“We believe one of the main challenges for pension funds, and opportunities for impact, is the effective stewardship of their assets. It is clear that the unstoppable ‘ESG train’ is picking up pace, and in some cases is being turbo-charged by climate change and the accelerating path to net zero.

“It is this focus on sustainability that will truly shape the pensions industry in the coming decades. A significant reallocation of capital is expected as the investment world undergoes a paradigm shift in extending its traditional two-dimensional focus on risk and return to one of risk, return and impact.”

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