Amid the often overly optimistic chat about how equities buying by the Government Pension Investment Fund will boost the Japanese stock market, it can be hard to grasp that much of the purchasing may have already happened and the rest will run into long-scheduled selling of shares by corporate pension funds going out of business.
GPIF could easily tap into such sales to acquire the level of stocks it seeks while making very little impact on prices and saving itself brokerage fees.
Common sense on the proportion of the Fund’s portfolio to be held in equities has settled in at around 20%. This compares with 16.47% at the 31 March 2014 year-end when the total portfolio was valued at 126,577.1 trillion yen.
Had 20% been in domestic shares at that time this part of the portfolio would have been worth 25,315.42bn yen against the 20,846.6bn yen of 16.47%, a difference of 4,468.8bn yen.
Already half way there?
Assume, as parts of the market do, that half of this figure has by now already flowed into shares. That leaves 2.23tr yen still to buy — and it is nor far away.
A little over 2tr yen of stocks is likely to be disposed of by those Employee Pension Funds (EPFs) whose parlous financial state has meant they have been unable to follow their brethren and convert to Fund DBs — though such sales will happen only if the MoHLW decides to dissolve the funds rather than prolong their agony.
The difference between an EPF and a Fund DB is that a sponsor with the former invests its own and its workers’ contributions to the government’s Employee Pension Insurance scheme and so finances the benefit (known as the daiko) which it pays.
Over a decade ago, companies recognised that, with markets slumping, they could no longer afford to be responsible for achieving the 8% return required and those with fully-funded daiko components were allowed to realise the assets and hand over the proceeds for management by GPIF. About 1,300 have done so to date.
Those with underfunded daikos were told there would be no handover until the problem was fixed. Although they were given five years from November 2012 to comply,the predicament of many is so dire that the longer they continue to exist the deeper it becomes.
At 31 March there were 531 remaining EPFs, down only 29 on the year before, with assets of 30.9tr yen. There is no publicly available and consistent estimate of how this breaks down but about 80% of it is thought to be backing for daiko components and about 20%, or 6.18tr yen, of the total to be held in domestic stocks.
At least a third of these plans is likely to opt for outright dissolution, if offered, as soon as possible – perhaps with some arrangement to make good on deficits at a future date. Any such arrangement would mean that the Ministry of Health, Labour & Welfare, the regulator, squeezing out everything it can, leaving nothing to put into a new pensions vehicle.
Most of today’s EPFs are multi-company arrangements set up to provide retirement schemes to small companies in the same industry within a defined geographical region. They are well known to the Ministry since its ‘guidance’ has ensured that each has a ministerial alumnus – typically a retiree – on the team which manages it. The MoHLW is also the home of GPIF.
The bulk of EPFs’ assets are kept in pooled accounts at trust banks or life insurance companies which act their sokanji. The institutions fulfilling this role for retirement schemes handle not just investment but also custody and all other administrative tasks such as valuations. There are 16 sokanji but the business is dominated by just half a dozen.
If GPIF is seeking to increase its equities holdings by 2tr yen it could help its Ministry colleagues to execute a quick and orderly wind-up of the EPFs likely to opt for dissolution by offering to buy the around 2.1tr yen they are thought to hold in domestic stocks.
¥2tr trade only a couple of clicks away?
With the Bank of Japan a willing buyer of the EPFs’ JGB holdings and the sokanjis able to put a stock deal in place – if not at a couple of clicks then at not much more – the only barrier would be the MoHLW’s ability to fulfil its own processes for putting the funds out of existence.
At its present rate of progress – 29 a year and about 180 funds waiting to be dissolved – it will take another six years to get the job done, putting it well over the initial deadline of November 2017; taking a flamethrower to it would prevent the threat of overhanging stock sales putting a further dent in the market very time it wobbles.
© 2014 Japan Pensions Industry Database/Jo McBride. Reporting on, and analysis of, the secretive business of Japanese institutional investment takes commitment, money and time. This blog is one of the products of such commitment. It may nonetheless be reproduced or used as a source without charge so long as (but only so long as) the use is credited to www.ijapicap.com.
This blog would not exist without the help and humour of Diane Stormont, 1959-2012