The Government Pension Investment Fund has published a 17-page English-language summary of the thinking behind its ‘Adoption of [a] new policy asset mix’ which is well worth reading.
As already reported (see post immediately below) the new portfolio will have 35% in domestic bonds, 25% in Japanese stocks, 25% in foreign equities and in 15% foreign bonds.
These proportions were worked out on the basis of GPIF’s investment horizon which is, in turn, based on the level of contributions by, and the projected life spans of, those who pay into the Fund and expect to receive pensions from it.
The summary notes (on page 6) that: ‘According to the Actuarial Valuation, the reserve asset level is to decrease for 10 years (payout is larger than contribution), which is followed by 15 years increase (payout is smaller than contribution). Then, the reserve asset level will decrease again.
‘Hence, the assumed investment horizon was set to be 25 years (10+15 years), beyond which the reserve asset is expected to start declining and investment policy should be more focused on the preservation of liquidity’.
The ‘Actuarial Valuation’ is likely to be that carried out once every five years by the Ministry of Health, Labour & Welfare, the latest iteration of which has been recently completed.
However the summary does not explain why the Fund can expect to enjoy a fifteen-year period in which contributions are larger than payouts in a decade’s time.
The size of the workforce will continue to decline during that period and the contributions which workers pay to the basic pension and employee pension schemes were set in 2004 to reach their maximum levels in 2017. They will then be 29,599 yen per month (in 2004 yen) for the former and 18.3% of salaries for the latter.
It may well be that MoHLW’s actuarial panel expects the level of benefits paid out to decline during this period — 2024-2039 – due to a presumed rise in the overall death rate as pensioners born in the post-WWII baby boom pass away and off the books.
If so, it should say so — especially since there is already a suspicion that GPIF is being directed more to meet what Japan’s current government sees as the needs of the economy than those of the retirees who own the funds.
It’s 5-3-3-2 all over again
This is redolent of the days before the 1995 reforms when companies’ ‘Employee Pension Funds’ (EPFs) were obliged to keep to the MoHLW’s 5-3-3-2 rule which stipulated that no less than 50% of the portfolio be in yen-denominated fixed-income paper, no more than 30% in Japanese equities, no more than 30% in foreign securities and no more than 20% in real estate.
This was one of several routes through which Japan’s government became the most indebted on earth without having to worry about what fixed income markets thought of it.
At that time, as now, the bulk of basic pension contributions were used immediately to pay for benefits. What was left over was held by Nenpuku which was obliged to hand it on to the Ministry of Finance’s Trust Fund and thus to the Fiscal Investment and Loan Programme which paid for the ‘second budget’.
Reversal of fortunes
EPFs were gradually released from the restrictions of the 5-3-3-2 rule and from 2002 allowed to hand over to GPIF a component of their schemes – known as the daiko – which they had previously managed on government’s behalf.
These developments radically changed the nature of pensions demand for asset management firms’ services.
In 2002 they had stewardship of 38tr yen of Japanese retirement-scheme money of which 39% was for GPIF and 61% for corporate schemes.
By 2014 this had become 75% for GPIF and 25% for companies and the total had swelled to 126tr yen – thanks in part to fund managers winning business away for trust banks and life insurers’ pooled accounts to be managed under segregated mandates.
The dependence on government and quasi-government business has grown in other ways too and it is now likely to be subjected to the same allocation guidelines as those set for GPIF.
As part of the 1990s’ reforms, a type of corporate pension fund known as a Tax Qualified Plan, about 60,000 of which were somewhat lightly supervised by the Ministry of Finance, were phased out.
SERAMA to go the same way?
Some of these schemes converted to one of the post-EPF types supervised by the MoHLW, others went out of existence and 30% of them opted to transfer their assets to the Small Enterprise Retirement Allowance Mutual Aid Scheme (Serama, the subject of an upcoming ijapicap profile) which now has 4tr yen in assets.
Serama will probably be ordered to follow the same asset allocation guidelines as GPIF whether or not it is actuarially appropriate for it to do so.
The two giant public service mutual aid associations — covering national and local employees — as well as one covering private school staff, which have combined assets of 27tr yen, have already been told they should follow GPIF’s suit.
It makes sense that any Japanese pension fund be free to have 50%, or even 100%, of its assets abroad since the growth opportunities are far higher there than they are at home, where the workforce is set to shrink and the economy must, ultimately, do the same.
Runs counter to good stewardship
But assuring the local stock market that it will always be home to a quarter of the country’s huge of pool of pensions savings is as unhealthy as previously assuring the government bond market that it would always have half.
In an age of equities indexing it seems especially misguided and antithetical to the Abenomics idea of shareholders seeking ‘engagement’ with companies through such devices as stewardship codes so as to make them better managed and more competitive.
The 5-3-3-2 rule lasted from the early 1960s to the mid-1990s and the new model asset allocation looks to an investment horizon of very similar length. By the time it comes to an end it will probably be causing massive distortions.
Leaving management of the funds to market forces and investment professionals would have been a much better bet. But this is Japan and Messrs Kuroda and Abe come from an old school of political economy — government knows best, even when it doesn’t.
© 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