Hope that the AIJ scandal will give rise to a more publicly transparent pensions management industry is fading fast while fear remains that it will result in inappropriate regulation – at the behest of some of the sector’s most powerful players.

A Ministry of Health, Labor & Welfare panel hearing views from various of the sector’s vested interests is likely to produce only recommendations that shore up those interests.  The hearings of a panel set up by the ruling Democratic Party of Japan are going the same way.

None of the seven essential points posited in 200bn yen missing from pension accounts 2: Why it happened (see archive, 9 March 2012) is likely to be addressed.

The Ministry’s self-imposed timetable for publishing a proposed new framework is mid-May. The schedule of the DPJ panel is unknown but the current Diet session ends on June and it has to get through contentious measures to raise the consumption tax before then.  

Caribbean culpability

The 100 billion yen (originally put at 200bn yen) of pension funds’ money lost by AIJ Investment Advisors was allegedly kept from clients’ eyes through the misreporting of asset values by fund administrators in the Caribbean.  Many support services have grown up over the decades in these islands to which the original attraction was low tax.

Japan’s inward looking regulators let it be known post-AIJ that they viewed such foreign services with disfavour. If they persist in this the tasks now offshored will have to be done in Japan at much greater cost – for which pensioners will ultimately pay – and by trust banks which as yet lack the experience and systems of their Caribbean counterparts.

Such a change may also miss the point: one of the dodges AIJ allegedly used in reporting to clients, which its president has confessed was fraudulent*,  was owning the distant entity providing the valuations.  

Even this level of Caribbean culpability may prove illusory if inquiries by the Tokyo police and the Securities and Exchange Surveillance Commission, due to get underway after Golden Week, show that any fiddling of the figures took place in Tokyo.

Quartet of giants

Meanwhile the four mighty trust banks – Mizuho, Mitsubishi UFJ, Sumitomo Mitsui, and Resona – are asking the DJP and Ministry panels not only to expand their access to infor-mation, in their roles as sokanjis and custodians, but to give that access legislative force. 

Through the Trust Companies Association they are seeking to have imposed on themselves an obligation to report to a pension fund when its asset allocation guidelines appear to have been breached – which means in turn that pension fund clients will need to inform them of the terms of every mandate.

The banks are also seeking a statutory right of direct access to valuation data on privately placed investment trusts – a category which includes hedge funds – based overseas. 

And they want external audits of fund managers that are not part of big groups, though whether this is of individual investment vehicles or whole firms – or both — is not clear. 

Since there is nothing to impede any of this happening on a voluntary basis right now, why are the trust banks asking for these changes to be given the force of legislation?

Because it would ensure them of a steady stream of competitive information about rivals.

USA 1975, Japan 1995

The causes lie in the 1995 deregulation of pensions management. Before then the investment of corporate retirement schemes was the sole domain of trust banks and life insurers offering pooled accounts – as it was in the US prior to the 1975 ERISA legislation.

The liberalisation allowed Japanese and foreign asset management firms into the business for the first time, their assigned purpose being to manage money awarded to them under specific mandates rather than kept in communal pools.

The next year saw the beginning of the bankruptcies which almost caused the Japanese financial system to implode. It survived only through massive capital injections from government and repeated rounds of consolidation which by 2012 had compressed 18 banks into five.

During the first several years of this period trust banks and life insurers lost much of their pensions market share to fund managers, but they were able to hang on to their pivotal role as pensions sokanji, or “organiser”.

Oh to be a sokanji

When an institution acting in this capacity sets up retirement scheme on behalf of a client company it expects thereafter to undertake all the pension fund’s administrative work including custody (and until 1995 asset management) pretty much in perpetuity.

This permits a sokanji to accumulate vast stores of information on specific schemes and their needs and, if not to control access to them, to influence their decisions by virtue of lifelong relationships. The top two, Mitsubishi UFJ and Sumitomo Mitsui, serve over 1,000 pension funds each. (For the position at 31 March 2011 click here. Note that Sumitomo Trust and Chuo Mitsui Asset have since merged.)

In the year ending 31 March 2008 Sumitomo Trust signalled that the competitive position of the banks relative to fund managers had rebounded when it leapt from 36th to seventh in the ranking of institutions by mandated pension assets under management. The next year Mizuho Trust followed suit.  Two years later the positions of pair had improved still further to second and third which is where they remain.

The trust banks’ renaissance is a function of:

*  Their now huge size and the clout it brings;
*  Their decision not to wait until they had all the requisite skills and experience to
    begin managing specialist mandates but to subcontract that work to others as necessary;
*  Their massive stores of information on individual pension funds and their needs

If they can now get legislative backing to force yet more data, this time from rival fund managers and from pension funds about the terms of their mandates with those managers, they will be able to return to an almost unassailable position.

Some fund firms have already rolled over and now concentrate on marketing themselves to trust banks, whose work brings in lower fees, rather than to pension funds. 

In this context the request that hedge funds not run by large institutions be independently audited looks just looks gratuitous, especially since a pension fund can already ask for – and receive – an audited report on a fund before it invests.

* However AIJ president Kazuhiko Asakawa has asserted that the company did not set out to commit fraud and its actions were not malicious.

© 2012 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.