A key rule governing the asset allocation of corporate tax qualified pension plans in Japan is expected to be abolished by the Ministry of Finance, the first such deregulatory step for the TQPPs.
The move is likely to take effect in Japan's next fiscal year, which begins April 1, several experts said.
Freed of their asset mix shackles, the funds ultimately could invest more heavily in equities, giving a boost to Japan's and other markets. The funds also could convert portfolios to more aggressively managed separate accounts from the current balanced.
But the initial liberalization is not expected to include freedom to use investment advisers. The funds, representing 17 trillion yen (U.S. $190 billion) and 92,356 plans as of March 31, 1995, the latest data available, still would be limited to using trust banks and insurance companies in Japan for managing their assets. Also, book-value accounting would continue.
Still, news of the expected deregulation of TQPP investments comes as a welcome - and for some, surprising - development. Thus far, the focus of pension deregulation had centered on employees' pension funds, which are the larger funds in Japan; as of March 31, 1995, assets of the 1,842 EPFs totaled 38 trillion yen (U.S. $424 billion).
Scrapping the current asset allocation rule for TQPPs would take pension liberalization a step further in Japan. Although EPFs, with a few approved exceptions, must still abide by the so-called 5-3-3-2 investment rule for assets of the overall fund, TQPPs would have no such restriction.
Now, each portfolio of a TQPP must abide by the 5-3-3-2 rule. That requires portfolios to have at least 50% of their assets in principal-guaranteed investments, no more than 30% in Japanese equities, no more than 30% in foreign securities and a maximum of 20% in real estate.
At least some TQPPs are expected to try to seize on the deregulatory opportunity. And some pension sponsors already are studying the new development and watching to see how it unfolds.
"Certainly, if (the deregulation) comes into being, we will rethink how we invest in Japan," said James E. Bayne, manager-benefits finance and investments, Exxon Corp., Irving, Texas.
In fact, Mr. Bayne will be in Tokyo this month "to see what is going on."
Exxon, whose Japanese subsidiaries have more than $400 million of pension assets, will want to study prospective changes for the TQPPs, Mr. Bayne said. But in broad terms, once liberalization comes, "we will move more heavily into equities and continue to index as much as we can, as we do elsewhere," he added.
Eli Lilly and Co. officials are "watching (developments) with interest. And we hope, in fact, there will be deregulation that permits a more active, diversified approach," said Frederick W. Ruebeck, director of investments at the company, based in Indianapolis.
Eli Lilly's subsidiary has $6 million of pension assets in Japan.
Mr. Ruebeck thinks it "would be great if TQPP investment rules became "totally open," but if the process is "taken in steps," then asset allocation deregulation is the best first step.
"For us," Mr. Ruebeck said, "it's not critical to have an option to use investment advisers."
Quite a few funds are expected to begin taking advantage of the deregulation as soon as it becomes official.
"Many funds have wanted to see this happen for a long time. Some of these already will have created action plans," predicted Richard L. Nuzum, a principal in the Tokyo office of William M. Mercer Inc.
Multinational companies, many of which have pension plans in countries with less complex pension investing rules, might be among those especially quick to move.
"Almost every other (multinational) client I talk with who has anything meaningful in the way of Japanese pension assets mentions Japan as a key (site) for an asset review," said Sandy Chotai, global asset consultant with Towers Perrin in New York.
For many TQPPs, the abolition of the 5-3-3-2 rule would mean that for the first time, plan sponsors will be able - and probably expected - to take some responsibility for their plan's asset mix.
That will be a significant change because until now, "they have been leaving the decisions up to managers," said Masanori Tsuno, president of Frank Russell Japan Co. Ltd., Tokyo.
Before pension executives make any changes, however, "there will be a lot of examining of the fund they'll need to do. They will need to (determine) their basic goals, what long-term asset allocation and manager structure would be appropriate, and how they can monitor" their plan, he said. "Compared with EPFs, most TQPPs are not yet prepared to make good investment" decisions, he said.
Once those reviews are undertaken, TQPPs are likely to shift some portfolios to specialist accounts from balanced ones, some consultants say. That change should lift funds' exposure to equities. In turn, more equities holdings should appeal to some sponsors of underfunded plans; in this case, expected higher returns from equities could trim contributions.