200 bn yen missing from pension accounts 2: Why it happened

A lively chorus designed to ring firms’ tills and swell government departments’ budgets is accompanying the Financial Services Agency’s probe into how billions of yen in pension clients’ money comes to be missing from their accounts with AIJ Investment Advisors.

Consultants of all stripes, hedge fund managers – several of them not registered with the FSA even though they are doing business in the country – and anonymous civil servants,  are all getting time centre-stage. (To see Ed Rogers talk his own book with great charm and no shame click here.)

Yet this is a drama defined as much by absence as presence – and it’s not just the absence of 200 billion yen. Japan has:

1) No definition of fiduciary duty and where it rests.  This is essential to determining the responsibilities of the market’s participants – from pension fund sponsors and the funds themselves to consultants, asset managers, custodians and other service providers, plus the regulators.

One of today’s many tangles over responsibility concerns the multi-company funds set up to serve groups of firms, defined by their industry or location, that are too small to run their own retirement plans. This also means they are too small to constantly monitor the operations of the multi-fund and to make good on any shortfalls. Yet the Ministry of Health, Labor and Welfare’s (MoHLW) supervision regime relies on them to do just that.

2) No pension fund members’ body or other club.  Japan’s Pension Fund Association (PFA) was set up by, and is still mostly staffed and paid for by, the MoHLW which uses it for some regulatory functions. It is wholly different from, for example, the UK’s National Pension Funds Association (NAPF) which undertakes research, lobbies on behalf of funds and stages two major investment conferences a year at which scheme staff hear expert presentations and get together with each other.

This is part of two wider problems:

2a) Japan has few, if any, horizontal connections between companies. Rather, the top speaks to the top through such entities as the Keidanren.

2b) Japanese firms seem unable to grasp that their pension funds are not in competition with each other even though their products are.  This makes them secretive about their schemes’ operations – a tendency which the MoHLW/PFA nexus sees as in its interest to encourage – and deprives them of the ability to learn from each other .

3) No pensions press.  Both the US and the UK are served by competing periodicals and associated web sites which carry news and analysis of developments in the institutional investment business, the firms that service it, and the securities markets where it invests.

The magazines are often delivered free since they funded by advertising  and – in the British case – NAPF facilitates their distribution by making its mailing list available.

Japan, by contrast, has Nenkin Joho, a U$1,00 a year fortnightly published by Rating and Investment Information, an actuarial consultant. While its ownership gives it some particular strengths, revelatory journalism is not among them.  Hidekazu Nagamori, the managing director in charge of the newsletter told the Asian Wall Street Journal in late February of how it had warned readers of its concerns over AIJ, adding that while AIJ was not named in the article “the description was enough to identify it to industry experts.” 

At the same time, the PFA absolutely refuses to countenance making available its mailing list while urging funds to sign up for membership so that they can be kept informed.

It is worth noting that although the general financial media cater well to what service providers want to know, they can lose their bearings when it comes serving capital owners. It is routine, for example, for Bloomberg, Reuters and local media to report that a former employee of investment bank X has started a hedge fund, without bothering to look at the FSA’s online list to find if the new firm is registered with it. See this example from the Japan Times.

4) No continuity of service or professional development for pensions executives. Like everyone else in a Japanese company, those in charge of its pension fund will be rotated through jobs across the firm once every three years. This means they can be helping run a manufacturing operation in Niigata one minute and the retirement fund the next.

As there are no pensions management qualifications, there are no firms offering courses or e-learning programs pitched at passing the exams. The Japan Securities Investment Advisers Association (JSIAA, the fund manager’s trade body) does what it can by distributing information sheets and holding meetings but employers need to step up and provide what is required.

There have been calls for pension funds to do better due diligence and take responsibility for their own actions. This makes sense but it is difficult to see how it can be done without a definition of fiduciary duty and very much better training for pensions executives.  

5) No registry of pension fund information.  There is too little information available to academics, the press, and anyone who simply takes an interest, for them to play a role in widening knowledge about pension funds and spotting mistakes and curiosities worthy of further investigation. 

In the US every pension fund has to file form 5500 annually with the Department of Labor in order to keep its tax status. If Hitachi can do this in the US without the sky falling in why not in Japan too?

6) No annual regulatory audits of asset managers. There is no sensible reason why not and firms should be required to submit annually to the FSA data audited by a third party. The Agency should also carry out at least 10-12 surprise inspections a year.

7) No ratings agency. Japan needs independent ratings of the extent to which fund management firms’ procedures are vulnerable to operational and investment risk – perhaps similar to those done in other jurisdictions by Fitch.

What the Japanese pensions sector needs most of all is a free flow of information and the clarity that brings. What it needs least are having consultants explain away complexity – that just makes room for more complexity – and civil service high priests seeing data as the secret ingredient in rituals only they can perform.

If the rule is caveat emptor then the emptor needs more knowledge. As in other aspects of investment, information makes the market more efficient.

See also below: “200 bn yen missing from pension accounts 1: How it happened”             Still to come:    “200 bn yen missing from pension accounts 3: What comes next”

© 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.

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