The two ministries that oversee Japanese pension funds are negotiating an easing of restrictions on how pension assets are managed, which could take effect as early as April 1.
Experts say the measures would accelerate the process of opening up Japanese pension fund management, now dominated by trust banks and insurance companies.
They also could set the stage for further, and ultimately complete, investment deregulation of Japanese funds. By 2000, Japan's Pension Fund Association hopes all of today's complex investment restrictions on corporate pension funds will be abolished and replaced by the prudent man rule.
The easing of the rules could also improve the prospects for non-Japanese investment advisers seeking clients in Japan, but no sudden breakthrough is expected. A recent survey showed Japanese investment advisers topped the preferred list of Japanese pension executives.
For now, proposed changes center on easing, rather than abolishing, restrictions.
The key proposals that apply to Japan's approximately 1,800 corporate Employee Pension Funds are:
Investment advisers would be allowed to manage up to one-half of the assets of EPFs, compared with the current one-third limit (trust banks and insurance companies manage the remainder). This proposal would accelerate an existing plan that would have allowed investment advisers access to one-half of the assets in October.
(At a later date, the Ministry of Health & Welfare wants complete liberalization of the amount of pension money that investment advisers can handle. But such a move would require a change in the law, which the ministry hopes will be introduced in the Diet in the near future.)
Trust banks in Japan would no longer have to comply with the so-called 5-3-3-2 investment rule. Under 5-3-3-2, each EPF account handled by a trust bank must have a minimum of 50% of its assets in principal-guaranteed investments, and no more than 30% of its investments in domestic stocks, 30% in foreign securities and 20% in real estate.
Instead, EPF sponsors will have to make sure their overall fund abides by the rule.
Under a separate proposal that applies to Japanese pension funds broadly, the government no longer would have to sanction the level of the guaranteed yield on insurance companies' general accounts.
This level is now set at 4.5%, but if the government's rate-setting involvement is eliminated, it is expected that insurers would offer a 2.5% yield. (General accounts pool assets from a variety of an insurance company's activities, including pension asset management. Most pension assets handled by insurers are included in their general accounts.)
Agreement expected soon
Many expect the Ministry of Health & Welfare and Ministry of Finance to reach agreement on these proposals shortly; if so, measures likely would become effective with the start of Japan's fiscal year April 1. Most of the proposals were part of deregulation recommendations made late last year by a government-appointed independent committee.
Experts say the proposed deregulation presages a significant change, especially for corporate EPFs, whose assets totaled 38.4 trillion (U.S.$357 billion) as of March 31, 1995. At that time, trust banks in Japan claimed the lion's share, roughly 59%, compared with about 37% for insurance companies and 4% for investment advisory firms.
Strict investment rules made it easy for pension sponsors to know how to allocate assets, but also made it difficult for them to try to bolster returns by adjusting investment processes. That later issue became ever more acute as Japan's interest rates fell to low levels - even as concerns mounted about the country's aging population.
But as long as pension funds still have to meet the 5-3-3-2 rule for the investment of the total fund, they may continue to limit investment strategy changes.
Some experts believe the biggest investment changes will come after new accounting rules are introduced in April 1997 (when funds must switch to market value instead of book value accounting). Further changes are expected if the 5-3-3-2 rule is abolished.
Funds may consider alternatives
Still, some funds are expected to try to take advantage of this year's deregulation, if it materializes. For example, various industry observers said they expect quite a few funds will consider a 2.5% yield on general accounts too low and will at least examine alternative investments.
Already, officials of the (yen) 23 trillion (U.S. $215 billion) Pension Welfare Service Corp., Tokyo, are thinking this way (See story on page 14). The PWSC fund is not among the EPFs.
But many major insurers already have established their own investment advisory subsidiaries, as well as so-called "separate accounts" in which pension funds can invest. This gives insurers additional products to market to customers.
Thus, although "several trillion (yen) could come out of insurers' general accounts, more than half (is likely to) come back to the investment advisory or special accounts of insurance companies," predicts Noriyuki Morimoto, director and consultant with Watson Wyatt Worldwide in Tokyo. He cites the importance of maintaining relationships.
Nevertheless, it's clear competition will be heating up among the various providers of investment services. While many predict investment advisers will enjoy the strongest growth level of new assets, trust banks and insurers will be defending their turf as well as vying for more assets.
For example, Ryujiro Miki, manager-ALM Development Division, investment planning department, of the Dai-ichi Mutual Life Insurance Co., Tokyo, said: "Our strategy will be to aggressively sell our general account product. A 2.5% yield is still very attractive when compared with the (3.3%) market rate" on Japanese government bonds, he said. To withdraw from such a safe assets could "threaten the security of stable payments to plan members in the future," he said.
He added Dai-ichi would be "happy to reallocate" the general account assets to a separate account managed by Dai-ichi or to the firm's investment advisory subsidiary.
Winners and losers
Morikuni Souma, general manager, pension fund management planning department, Yasuda Trust & Banking Co. Ltd., Tokyo, believes heightened competition will result in winners and losers among individual managers - as opposed to whole sectors, such as trust banks or insurers.
In this context, Mr. Souma is confident about Yasuda's continuing success. Not surprisingly, Yasuda expects "continued good growth" of business, said Mr. Souma. "We expect the total market size to increase at a double-digit rate. And our own assets under management should increase faster than the total market," he predicted.
As for investment advisers, their growth would come from a very low base, fueled by perceptions that they excel in such specialties as domestic or foreign equities, emerging markets and global bonds. As deregulation continues, interest in these areas is expected to grow - a factor some think could give foreign firms a competitive advantage. But no such competitive edge is apparent so far.
For example, a Japan Bond Research Institute survey of investment advisers' popularity turned up bad news for foreign-based firms: nine of the top 10 picks were Japanese-based. Even more significantly, nine of the top 10 management firms that funds said they hoped to hire were Japanese.
Some close observers see more opportunity ahead for foreign investment advisers. "Not many pension funds are using investment advisers as yet," noted Tadahisa Hamaguchi, JBRI's editor in the pension and investment news department. Local funds will "always pick up Japanese managers first; but as a second step they may go to foreign managers," he said.