Pension funds don’t know what they are doing – it’s official

Parts of this article have been amended since it was first posted on 30 March

Almost 90% of staff at pension plans that are run for small companies based in the same prefecture and involved in the same business sectors had no investment experience before they joined the fund, a study by the Ministry of Heath, Labor and Welfare shows.

This type of ‘multi’ investor has suffered most in a scandal in which AIJ Investment Advisors appears to have lost 109 billion yen [corrected figure] of its clients’ money.

The questionnaire on which the Ministry’s survey is based was mailed to all 581 multi schemes, the only surviving remnant of the system of Employee Pension Funds (kosei nenkin) that until 2002 included single- and allied-company arrangements as well.

Some 558 multis (96% of the universe) responded. The data they provided to their regulator show the average number of investment staff per fund to be 3.7 people and that:

*   88.4% of staff had no investment experience before their current job – just 71 people had such experience gained in a financial institution.

*   92.3% of staff had no investment-related qualifications – only 37 people were qualified as “CMAs” or “Financial Planners”.

*   90% of funds (501 in all) reported having an “Investment Committee” but just 57 funds had outside investment specialists in those committees.

*   only 30% of funds use consultants.

There is little reason to believe that staff running single- and allied-company pensions – now differently constituted than when they were kosei nenkin – are any better qualified; as the employees of the funds’ sponsors, they are rotated through departments across their firms once every three years tey have little opportunity to gain experience..

With the MoHLW’s figures confirming that a lack of competence runs throughout the system it is time to acknowledge that the deficiency reaches the Ministry itself.

The AIJ story begins in 2002 when the firm first entered the pensions management business which was then at a critical juncture

Before this time companies had been responsible for managing the investment of contributions to their own schemes (the system’s third pillar) and those their workers made to the national Employees’ Pension Insurance plan (which backs the “substitutional component”, or daiko, the second pillar).

Far from shirking this responsibility, Japan’s corporate pension sponsors had come to love it by the late 1980s. A stockmarket bubble was then giving double-digit annual returns well above the 5.5% required on second pillar daiko investments and sponsors were allowed to use the hefty surpluses to fund their third pillar schemes.

The equities party ended in 1990. A dozen years and several false dawns later the Government Pension Investment Fund – which, though independent, falls within the MoHLW’s sphere of influence — agreed to take over management of the second pillar but sponsors were allowed to hand over a daiko only if it was fully funded.

For many multis this was not the case.  With the Nikkei 225 index nearer 10,000 in 2002 than the 40,000 it hit in 1990, the problems of the daikos have been literally compounding — at 5.5% a year. About a third of them are still underfunded.

During this period the Social Insurance Agency arm of the MoHLW, whose job it was to collect contributions to the basic national pension (the first pillar), was staging a series of dishonest antics (see 5 March posting below) until it was re-established as the Japan Pensions Service in October 2010.  

Over 600 of the staff which the SIA shed during this exercise found employment at 399 multi-company pension funds, despite their experience being in collecting and fiddling finances not in investment.  The story of how this network of amakudari was introduced to AIJ, with which 88 of them invested, is told the same 5 March posting below.

Throughout this two-decade long period, the Ministry has been receiving annual reports from multi-company schemes on the funding status of both their main (third pillar) and daiko components. Yet it has made few moves to dissolve even those which are not merely underwater but nearing the bottom of the Marianas Trench.

As Junichi Sakamoto, head of the Ministry’s actuarial affairs bureau from 1999 to 2004 and now chief researcher at Nomura Research Institute, put it in recent responses to the Nikkei newspaper: “The government should have taken bold measure for financially marginal pension plans.”

In this context AIJ looks ever more like a scandal to which the MoHLW has been central.

The day has come for all its pensions responsibilities to be handed over either to a new Ministry of Pensions or to the Financial Services Agency which would then have regulatory charge of both funds and their service providers.

This would in turn enable serious work to begin on building bridges to span the information void between the two sides of the industry that has been an enduring theme of this blog. (See, in particular, the seven points made in the 9 March posting below 200 bn yen missing from pension accounts 2: Why it happened.)

So long, that is, as the civil servants running the shop have attitudes to data far removed from those at the MoHLW.  Easily their favourite reason for not allowing public access to information they collect from pensions is that it cannot be made available to what translates as “just anybody”.

Presumably because just about anybody could have spotted that they have been asleep at the wheel.

© 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

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