Japan's Pension Fund Association wants to go all the way with investment deregulation.
In January, U.S.-Japan negotiations brought a significant opening for foreign managers to Japan's pension market. But a key part of that had to do with giving investment advisers access to the public pension market.
In the latter part of next year, additional deregulation measures affecting corporate employee pension funds are due. Around October 1996, half of the assets of corporate employee pension funds are scheduled to become available to investment advisers, instead of having to be managed by Japanese trust banks and insurance companies.
But the Tokyo-based Pension Fund Association doesn't want to stop there. It wants additional investment flexibility leading to the abolition of "every kind of investment restriction" on Japanese employee pension funds, said Osamu Kido, the PFA's executive managing director. Ultimately - after the government's next review of Japan's pension rules, scheduled for 1999 - the association hopes investment regulations for pension funds will be replaced by the prudent man rule.
As an interim step, the 1,800-member PFA has asked the government to abolish the investment restrictions that apply to individual managers.
(Currently, two-thirds of the assets of an employee pension fund must be invested with Japanese trust banks and insurers, and the rest can be handled by investment advisers. Each account in that two-thirds must abide by the so-called 5-3-3-2 investment rule. That rule mandates that no less than 50% of an account must be invested in safe assets; up to 30% can be in equities; up to 30% can be in foreign securities; and a maximum of 20% may be invested in real estate.
Although beginning in late 1996 the rule will only apply to each account in one-half of a pension fund's assets, the PFA wants all restrictions on individual managers scrapped; in that case, pension sponsors would have to ensure their entire fund abides by the 5-3-3-2 rule.)
To promote the adoption of the prudent man rule, the association is discussing the subject in its seminars and has begun a special study into the prudent man rule.
At least some pension officials say they favor the prudent man idea. But whether the government will embrace such a big change remains uncertain.
"Over the longer term, consideration of abolishing the 5-3-3-2 rule" should be considered, said Keiichi Fukuyama, director of the Investment Guidance Division, Pension Bureau, Ministry of Health & Welfare. "But when 5-3-3-2 rules are abolished, substitute rules should be introduced to help control investment risk.
"Some people have suggested prudent person rules. But I don't think many Japanese people in investments are familiar with such rules. It will take time to discuss what kind of rules would be better than 5-3-3-2."
Mr. Fukuyama couldn't say whether 2000 would be "too late or too early to abolish 5-3-3-2."
The Ministry of Health & Welfare has recommended the Ministry of Finance favor the PFA's interim request to scrap 5-3-3-2 rules applying to individual managers. So far, the Ministry of Finance hasn't responded. The ministry generally is seen to protect the trust bank and insurance industry, which could be hurt by further opening of the pension market.
But the Pension Fund Association sees a number of reasons for pushing deregulation. For one thing, Japan's aging population will put increasing demands on pension providers. Higher investment returns would go a long way toward easing the burdens that otherwise would fall on employers.
In addition, the association is worried about additional bankruptcies among funds. Right now, mismanagement of a pension fund can be blamed on the 5-3-3-2 rule. But if a prudent man rule were adopted, perhaps more responsibility for a bankruptcy might fall on "the person in charge of managing pension assets," noted the PFA's Mr. Kido.
This issue is important to the PFA because, among its functions, the organization takes over the financial support of funds that have gone belly-up.
The prudent man rule also has at least some support among pension sponsors. Teruo Takahashi, director in charge of investment of the (yen) 450 billion (about $5.2 billion) Mitsubishi Electric Employees' Pension Fund, Tokyo, favors easing investment restrictions. He believes "eventually it would be a good idea to have a prudent man rule because pension (sponsors) should" be taking responsibility for the management of their own funds. "But in Japan, it's impossible to have a quick change. We need steps. And these could be" the introduction of investment standards, he said.
Yoichi Sugimoto is senior managing director of the (yen) 355 billion (about $4.1 billion) Japan Securities Dealers Employees' Pension Fund, Tokyo, and a member of the PFA group working to abolish the 5-3-3-2 investment rule by 2000. In his view, the prudent man rule allows funds to invest intelligently on behalf of their beneficiaries. "If a pension fund controls risk itself, then specific rules aren't necessary," he believes.
Of course, the advent of investment standards - instead of hard-and-fast rules - would certainly concern Japanese trust banks and insurance companies. Today, they enjoy a legal monopoly on managing Japanese corporate pension assets and benefit from time-honored relationships with clients. But the very rules that have given them the investment edge may impede their getting more assets. After all, 5-3-3-2 rules emphasize low-risk balanced investing; and that won't be the right formula for the future, when companies will need far fatter pension funds to pay for their growing ranks of retirees.
In response to deregulation, more trust banks and insurance companies in Japan are setting up separate investment advisory units.
But independent investment advisory firms believe they can compete well in this arena because of their experience dealing in assets that are marked to market. In contrast, Japanese trust banks and insurers have operated within Japan's book value system of pension accounting, which is supposed to change in 1997 to market value accounting.
Said Michael Lindsell, investment director, G.T. Management (Japan) Ltd.: "We are in a position to take market share, albeit slowly" from trust banks and insurers. "What's already been happening is that big (pension funds) have been giving a little (money) to G.T. to see what happens. If they like what they see, they will give (us) more money," Mr. Lindsell said, which would help "level the playing field."