This document discusses the outlook for private household financial assets in different regions and scenarios. It provides an overview of historical development of financial assets internationally from 1996-2008. Household financial assets significantly declined in 2008 globally due to stock market and housing crashes. The document then outlines four potential scenarios for financial asset growth through 2020: a basic scenario assuming gradual economic recovery; an "additional savings" scenario with higher savings rates; a pessimistic scenario with continued recession; and a positive scenario with strong growth.

1. No. 1|2009
International Pension Papers
Private household financial assets:
the golden days of the past are a long
way off

2. Allianz Global Investors International Pension Papers No. 1|2009
Content
Private household financial assets: the golden days of the past are a long way off – Introduction. . . . . . . . . . . . . . . . . . .. . 3
Development of financial assets – an international comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Outlook. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Basic scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
“Additional savings” scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pessimistic scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Positive scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Imprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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3. Allianz Global Investors International Pension Papers No. 1|2009
Private household financial
assets: the golden days of
the past are a long way off
Introduction
Private households around the world suffered savage blows to their savings in 2008, the
likes of which have not been seen for many decades. In Japan, Australia, North America
and Europe, households jointly lost a total of more than over EUR1 8.8 trillion in one year2. 1 Converted at the 2008
All over the world, equity markets closed the 2008 financial year with significant two-digit exchange rate
losses. The slump is particularly severe as real estate markets also crashed and affected
2 The 2008 year-end
investments not previously seen as having significant correlation. In contrast to the past, figures were available for
a widely diversified portfolio offered minimal protection. In this respect, the current most European countries;
figures for the Netherlands,
developments are unusual and outcomes cannot be predicted with any certainty.
Switzerland and Denmark
While there are weak signs of a recovery in the real economy, no one knows if this will were missing at the time
be strong enough to pull the world out of the crisis. How quickly and sustainably private this report was written.
These figures are based
households can recover their financial losses will depend largely on the extent and
on estimates, which are
length of the recession, especially since unemployment and a fall in disposable income
combined as “Western
will also limit savings potential. Europe”. The data for
Eastern Europe is based
on estimates by UniCredit.
3

4. Allianz Global Investors International Pension Papers No. 1|2009
Development of financial assets –
an international comparison
A t the end of 2008, the gross financial
assets of private households in the USA
totaled EUR 29.6 trillion compared with EUR
assets in the USA and Western Europe rose
in three years (1996 to 1999) and this was
thanks to a stock market boom and a strong
35.8 trillion in 2007 – a loss of 17.4%. This loss affinity for equity investments, especially in
was considerably higher than in Western the UK and USA. In the same period growth
Europe where savings fell from EUR 25.5 tril- in Japan was modest, partly because of the
lion to EUR 23.5 trillion, a loss of “only” 8%. crisis in neighboring countries.
The smallest decline experienced by the
countries under consideration was in Japan Assets, particularly in the US, literally dis-
with 5.5% (EUR 9.5 trillion to EUR 9 trillion). appeared after the stock exchange crash that
followed in the wake of the dotcom bubble.
Even after the crash, US private house- Private household financial assets decreased
holds had gross financial wealth in relation over three years and at the end of 2002 were
to the GDP of 289%, a figure higher than in 15% lower than in 1999. When the tide turned
Western European households3 (198%), but in 2003, this decline was recovered in less 3 Western European EU
lower than Japan (293%). However, as Japanese than a year. Savings patterns in Western Eu- members plus Norway
GDP also fell in 2008, this does not necessarily rope were similar to the USA. However, the and Switzerland
indicate that Japan is standing strong during more conservative investment behavior in
turbulent economic times. Rather weak eco- the euro zone meant losses was not as high 4 Comparable data for
nomic growth and low interest rates over the as in the USA. Instead, between the critical Western Europe is not
last 15 years means Japan has seen no signif- years of 2000-2002 European financial assets available; smaller coun-
icant leap in financial assets. The picture is stagnated. tries in particular do not
different in the two other regions: on balance, yet have long-term histor-
private households in the USA and Western While the positive stock market from ical data available due to
Europe doubled their financial wealth be- 2003-2007 encouraged many Europeans to new financial accounting
tween 1996 and 20074. invest either directly or indirectly in equities regulations for private
again, others – for example, German private households.
However, financial assets developed households – took advantage of the price rises
unsteadily in the 12 years to 2008. Financial to sell. In some cases, these were investments
Financial assets of private households – selected regions in comparison [1996 = 100]
220
200
Western
Europe *
180
USA
160 Japan
140
120
100
80
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
* Allianz Global Investors’ estimates for some Western European countries 2008; Sources: Central Banks, Statistical Offices, Allianz Global Investors
4

5. Allianz Global Investors International Pension Papers No. 1|2009
that have been bought towards the end of the of the Atlantic. In the USA this is because more
boom in the late 1990s. Equity markets showed funded pension schemes exist. In Europe a
signs of turbulence in 2007, making Europeans number of countries have undergone reforms
even more risk averse. Money was transferred calling for stronger funding elements to the
into safer investments. On the interest front, pension system. This is driven by long-term
too, the difference between short- and long- financing issues that threaten state pension
term rates declined in 2007, encouraging systems. Professionalisation seems to have
savers to invest in term deposits and other had a positive effect in Europe on the develop-
forms of banks savings. The turbulence in ment of financial assets as insurance com-
2008 exacerbated the situation further and panies structured their portfolios more con-
reinforced the cautious behaviour of private servatively in light of experiences during the
investors. Consequently the trend away from crash at the turn of the century. For private
bank deposits towards capital market prod- households the performance of this product
ucts that had been evident over a number group was consequently more stable than in
of years has come to a temporary end. the USA. In addition, the fall in property prices
Nevertheless the portfolio structure in Eu- also had an indirect effect on financial assets
rope remains more conservative than in the since the valuations of nonquoted compa-
USA, even if banking investments have seen nies, in which private savers can invest, also
a minor renaissance in the USA recently. includes real estate assets. In the USA the
product group “unincorporated proprietors
The savings business has become in- business” accounted for a sizeable 18% of the
creasingly professional in recent years. For household portfolio. These differences help
example, private portfolios now include more to explain why European losses in 2008 were
Figure 13
funds as well as insurance products and not as severe as those in the USA.
pension funds. Pension funds in particular
have experienced steady growth on both sides
Structure of financial assets of private households in selected regions
100 0.6 3 3.5 3.9 2.1 2.4 3.1 3.7 3.6 5 4.3 4
27.8 29.1 Other
31.2 30.3 29.3 28.2 26.4 25.8 25.6 27
80 34.2 34.5
Insurance/
8.9 8.3 9.3 5.9 pension plans
8
60 25.1 7.2 8.5
10.1 9.6 Shares/
30.7 20.2
26.2 39.9 mutual funds
14.4 44.9
47.3
40 11.2
6.7 Bonds
7.3 6.2
53.6 54.7
% of total assets
9.1 51 51.3 Bank deposits
20 35.4 9.9 7.9
34.7 6.9
27.8 30
19.1
14.6 13.2 15
14.8
0
1996 2000 2007 2008 1996 2000 2007 2008 1996 2000 2007 2008
Western Europe * USA Japan
* Allianz Global Investors’ estimates for some Western European countries 2008; Sources: Central Banks, Statistical Offices, Allianz Global Investors
5

6. Allianz Global Investors International Pension Papers No. 1|2009
Outlook
A fter more than one and a half years of
financial crisis, depressed equities and
steady deterioration in the real economy,
As past experience shows, it is difficult to
forecast the development of financial assets
as this depends on factors such as the per-
it is only now that markets are seen as re- formance of equity markets and changes
turning to a measure of stability. For private in interest rates and income (see Box 2). In
households, the question is how long will it addition, preferences for particular forms of
take them to rebuild significantly depleted investments also depend on factors that are
nest eggs? This question is critical in coun- difficult to forecast, such as legal, regulatory
tries where funded pension schemes play or fiscal changes. This is particularly true in
a large role and equities account for a high the current environment where investors and
share of financial assets. The losses experi- market players are unsure and considering
enced in these countries were proportion- their responses. The only sensible method to
ately high. chart potential developments is by outlining
different scenarios.
Basic scenario
In this projection it is assumed that there of potential growth paths in the economy.
will be a long-term change in the structure The basic scenario assumes that the current
of financial portfolios of private households. positive signals will lead to sustainable im-
Estimates are based on the performance provements in the short term and that the
Box 1
Determinants for the build up of financial assets
The household sector’s financial assets are calculated in the financial flows statistics provided by Central Banks or National
Statistical Offices. The aggregate financial account shows by whom, on what scale and in which form financial resources were
made available in an economy. It comprises those transactions that occur in the financial sphere and records the amount of
financial assets and liabilities on a given date. In this way it provides an overview of the underlying structure of the financial
systems and of sectoral behavior (households, enterprises, government and others).
Holdings of financial assets are valued at market prices (or estimated market-based prices). In the case of unsecuritized
claims and liabilities, this largely corresponds to the nominal values (for example, bank deposits), in the case of shares, for
example, to the daily market prices. The amounts stated for insurances correspond to technical reserves.
Changes in market prices are an important determinant for changes of financial assets. Other components are the flow of
funds. In this context it is important to remark that the amount of savings differs from the flow of funds. The savings ratio is
usually calculated as the difference between income and consumption and often used as an indicator for savings behavior.
But this might be misleading for cross-country comparisons because of calculation methods. Contributions to pension
schemes are not part of the savings volume and are treated differently to investments in other financial assets, such as bank
deposits. While the former is recorded as an expense for households in the national accounts (so, reducing saving, but
increasing wealth), the latter is viewed as savings. This explains how countries with large funded pension systems often have
low savings ratios, but high financial wealth (as a share of GDP). This explanation puts the low savings ratio of US and British
households compared to the higher ones in Germany or France, for example, into perspective.
6

7. Allianz Global Investors International Pension Papers No. 1|2009
economy will recover in the second half of the beginning of 2010 with an equity perform-
20095 as wide-ranging economic programs ance of 7% p.a. forecast for the period. 5 Forecasts are based
start to take effect. On balance, economic per- on estimates by Allianz
formance in 2009 will be negative, but this Under this scenario the financial assets of Economic Research &
will not be fully reflected in disposable in- private households in the USA will increase to Corporate Development.
come. In addition, the low inflation rate will EUR 45.5 trillion by the year 2020. This is 54% Economic forecast
give households more financial scope than higher than at the end of 2008 and represents 2009/2010, Working
in mid-2008. Between July 2008 and the first an average annual increase of 3.6%. On the Paper 124, March 2009.
quarter of 2009 the inflation rate fell from 3.3% basis of 2007 figures, only 1.9% would be
to 1%, partly as a result of lower commodity achieved. This would be the lowest annual
prices. For example, in mid-2008 the oil price average growth measured over a decade since
was still over USD 140 per barrel, almost three the 1950s6. The severity of the 2008 slump is 6 This analysis is based
times as high as at the beginning of 2009. reflected in the length of time required for as- on figures starting from
sets to return to the 2007 level. On the basis of 1952.
This development, coupled with caution the assumptions in this scenario, which takes
on the part of investors and the efforts of into account a turnaround in the economy and
many private households to even out losses, slightly calmer financial markets, it will take
especially where pensions are concerned, until 2014 for finances in the USA to recover.
should lead to slightly higher investments.
For the purposes of this scenario it is also In Western Europe the slump was not
assumed that at the end of 2009 the stock so dramatic and more has been saved on
exchanges will have returned to the 2008 average over the years. In the basic scenario
year-end level. In the first quarter of 2009 the for these countries, the dent can be smoothed
major exchanges in Europe and Asia lost ap- out in 2011. In Western Europe financial assets
proximatley 20% of their value. Although there are expected to increase by 74% to a total
has been a strong, fast recovery in the second of EUR 41.4 trillion in 2020 or 4.7% p.a. This
quarter, uncertainty still prevails. It is also as- means that assets in Western Europe will
sumed that the situation will normalise from gain on those US households. In Japan it will
Financial assets of private households – selected regions in comparison | Base Scenario [1996 = 100]
variation of
320 the different
scenario results
280
240
200
160 Western
Europe
120 USA
Japan
80
1996 1998 2000 2002 2004 2006 2008 2010* 2020*
*Allianz Global Investors estimates from 2009 onwards
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8. Allianz Global Investors International Pension Papers No. 1|2009
be difficult to increase assets. Lower growth, and third pillars of retirement pension
lower interest rates, a high proportion of bank schemes have been continuously developed
deposits and a weak life assurance business with investors aiming for a balanced mix of
due to the rapidly ageing population could safe investments and promising opportuni-
all mean that it will take well into the next ties. However, it is still very uncertain as to
decade before the 2007 level is reached when private investors will regain their confi-
again. dence in more complex forms of investment
in the capital markets. The last crisis at the
In this scenario Western Europe would turn of the century may have shaken people’s
seem to have the best chances of a quick faith in systematic, long-term accumulation
recovery. This is mainly due to the fact that of assets, but the big crash in 2008 could have
Continental Europeans have traditionally destroyed this completely. 7 See Box 1 for the factors
been regular savers. In addition the second influencing the develop-
ment of assets and the
resulting scenarios.
“Additional savings” scenario
8 See Box 1 for the effects
The pressing problems in connection with tional savings” scenario, we assume house- of savings ratios and con-
pensions and the gaps in the pension funds holds will save more , which could either tributions to retirement
may mean that private householders have mean saving more of their income or mak- pensions on the develop-
to save more7. For this reason, in the “Addi- ing higher contributions to pension schemes8. ment of financial assets.
Time needed to surmount the 2008 wealth losses
Base
Negative economy
Western
Europe Positive
Additional saving
Base
Negative economy
USA
Positive
Additional saving
Base
Japan Negative economy
Positive
Additional saving
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Allianz Global Investors, International Pensions, July 2009
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9. Allianz Global Investors International Pension Papers No. 1|2009
The majority of assets are in fact accumulated 52.6 trillion, which would almost match the
in order to prepare for retirement, either as growth in Europe. In this case the relative
private savings or through company pension positions of the two regions would remain
schemes. Due to the huge losses in the capital stable in comparison with 2008: Gross finan-
stock of pension funds, many companies will cial assets in the USA would be about 25%
try to bridge the gap by increasing contribu- higher than in Western Europe, where in this
tions. This would be a possible reaction in scenario they will be around EUR 42.4 trillion
the USA. in 2020. The difference from the basic scenario
will not be as marked in Western Europe
Higher regular contributions to pension because the saving level there is already high,
schemes in particular could lead to a growth so there is little room to increase it: Europe
in financial assets in the USA of almost 5% would again reach the 2007 level by 2010. In
p.a. (between 2008 and 2020). This scenario the USA the higher inflow to pension schemes
shows high growth potential because retire- and savings would reduce the regeneration
ment products account for a high percent- period by about one year. This means the
age (about one third) of the financial assets 2007 level could be reached by the year 2013.
of private households. The financial wealth As in the basic scenario, no significant im-
of American households could reach EUR provement is expected for Japan.
Pessimistic scenario
In view of the current situation, with the disposable income will be negatively affect-
global economy in the worst recession for ed and savings potential noticeably reduced.
80 years and no sustained recovery in sight, In the USA employees reaching the end of
a more pessimistic development cannot be their working lives may postpone retirement,
ruled out, especially as the positive impulses which could have a certain counter effect, as
from the current ambitious economic pro- pension fund capital would not be required
grams are likely to lose strength in 2010/2011. immediately and could be stocked up. Based
The pessimistic scenario assumes a longer on these assumptions financial assets in the
recession and a much slower recovery on USA will only grow to EUR 42.6 trillion by the
equity markets. In particular, it is assumed year 2020 (3.1% p.a.). It will be 2017 before
that equity markets will decline by another the volume of assets has reached the level of
15% by the end of 2009, will stagnate on bal- 2007 again. In Europe, too, growth of finan-
ance in 2010 and only close with a slight plus cial assets will be approximately 0.5% lower
in 2011. p.a. in comparison to the basic scenario. The
relatively stable inflow of funds in Europe will
Under such a pessimistic scenario, higher have a stabilizing effect on the overall perform-
unemployment is to be expected as are lower ance of financial assets in this scenario, too.
pay rises or even pay cuts as, for example, the It will take until 2012 before the 2007 level
effects of reduced hours are felt. This means has been reached again.
Positive scenario
Based on the recent years, it is possible to a marked swing from extreme negative trends
imagine that equity markets will recover their to equally positive ones. For example, between
strength to such an extent that there will be 2003 and 2007 the recovery on equity markets
9

10. Allianz Global Investors International Pension Papers No. 1|2009
was, at times, spectacular. If we assume in The highest increase in assets given this
this positive scenario a similar recovery with scenario would be in Western Europe where
a plus of 25% in 2009, a slight respite in 2010 the volume could almost double to EUR 46.1
(+10%) and another surge in 2011 (+20%), then trillion. This scenario would even see Japan
the recovery period in the USA would be short- experience sustainable recovery. This means
ened considerably. Assets could again reach that even in countries where people do not
the 2007 level by 2011. By 2020 the situation invest substantially in equities this scenario
could be normalized and the wealth of private has the highest growth potential.
households could total EUR 53.2 trillion,
which is comparable with the additional
savings scenario.
Box 2
Scenarios for the development of financial assets
According to the determinants for financial assets there are different approaches for the scenario set up. In addition to a
base scenario, other variants with “Additional saving” efforts are presented. In this case households of all countries increase
their savings rate by 10% overall compared to the base scenario. For countries with strong funded pension systems an
increase of contributions to pension schemes in 2009 and 2010 is assumed.
Different developments of financial markets were modeled in two versions. The positive scenario assumes a strong recovery
comparable to the period 2003-2007. The negative scenario calculates a slower recovery of the economy than in the base
scenario with a negative effect on income and financial markets. The result is a slower recovery of stock exchanges.
Results of another variant modeled on investment behavior and the resulting change of the investment mix in a given year
will not be presented in this paper. There are only minor differences to the base scenario as the Europeans changed their
investment behavior in 2008 to more conservative and cautious strategies.
Determinants for the build up of financial assets
Regulatory changes
Income Financial assets Financial markets
Valuations
Flows
• Development • Portfolio-mix
• Split: consumption/savings;
contributions to pension plans
Scenarios
“Additional savings” “Risk aversion” “Positive” scenario
Additional savings / higher con- (recovery as during 2003/2007)
tributions to pension plans “Negative” scenario
Source: Allianz Global Investors, International Pensions, July 2009
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11. Allianz Global Investors International Pension Papers No. 1|2009
Summary
T he greatest growth potential would be
realized in Western Europe and Japan if
the equity markets were to see a strong re-
saved more or paid higher contributions to
pension schemes, the USA could see similar
growth rates to those expected in Europe.
covery comparable with the years between In the major continental European countries
2003 and 2007. The possibility of such a de- in particular, people save noticeably more.
velopment cannot be ruled out. After all, the Both regions could see growth of almost 80%
markets have often experienced excessive by 2020 under the given conditions. But this
reactions. On the other hand, the shockwaves scenario also has its downside since higher
that have rolled through the financial markets savings means less consumption, which has
were the worst since the Great Depression of been the main growth engine in the USA for
1929. Investors’ confidence has been serious- years. If Americans were to save just 1% of
ly impaired and, even if equity markets do see their disposable income of approximately
a strong recovery, private households may not USD 10.6 trillion then USD 106 billion less
participate directly. However, they might profit would be spent on consumables. This in turn
indirectly through involvement in pooled could lead to a chain reaction that could
forms of investment. have a negative effect on the world economic
recovery, so the basic assumptions of this
Of course, the USA would also see high scenario may prove too optimistic. Never-
growth in the value of assets if this were the theless, it seems unavoidable that, especially
case, but the growth would be more sustain- in countries where there are huge gaps in the
able if there were also an additional influx pension funds, more will have to be saved and
of savings. If private households in the USA even then recovery will be a long time coming.
Imprint
Publisher: Allianz Global Investors AG, International Pensions, Seidlstr. 24-24a, 80335 Munich, Germany | International.Pensions@allianzgi.com
http://www.allianzglobalinvestors.com | Author: Dr. Renate Finke, Senior Pensions Analyst, Allianz Global Investors AG, Renate.Finke@allianzgi.com
Layout: volk:art51 GmbH, Munich | Printing: Christian Döring GmbH, Munich | Closing Date: July 13, 2009
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