Japan's Employees' Pension Funds are expected to be freed from onerous investing rules by early spring next year, at least a year earlier than previously scheduled.
A decision on when the so-called 5-3-3-2 rules for the EPFs should be scrapped is expected by the end of December, said Ryu Jubishi, director of the pension and welfare department of the Japan External Trade Organization in New York. But at this point, it appears the change could become effective between January and April.
The move would be a significant change for EPFs, typically the larger corporate funds, that now need to keep at least 50% of assets in principal-guaranteed investments. (Starting last year, some EPFs were allowed to apply for dispensations from the rule. More than 20 have been granted that investment freedom, sources say.)
Freed of the investment rules, more funds are expected to elect higher weightings to equities, both foreign and domestic, as they seek better returns. That quest, in turn, should result in more money manager hirings.
But for the short term, EPFs still will face limits on their use of investment advisers. As of now, EPFs must use trust banks and insurance companies in Japan to manage at least half of their assets. The government is not expected to lift that rule until April 1999.
All the same, the abolition of the 5-3-3-2 rule provides freedom from big holdings of low-yielding instruments that prompted fears of underfunding.
Under the rule, in addition to 50% being in "safe" assets, no more than 30% can be in Japanese equities, 30% in foreign securities and 20% in real estate.
This move forward for EPFs fits the government's broader agenda of improving the economy and competitiveness through reform and deregulation. This pension change "is one of the things that can be done" in the very near-term, explained Mr. Jubishi.
Already, more funds are taking advantage of investment liberalizations.
A study by the Tokyo office of InterSec Research Corp. shows the more than 1,800 EPFs had an average allocation of 15.5% Japanese equities and 9.8% foreign stocks in 1997, up from an average 10.3% Japanese stocks and 6.6% foreign equities in 1993.
Hiroshi Nakagawa, managing director of InterSec's Tokyo office, projects that by the end of 2000, EPFs should average about 25% in domestic equity and 15% in foreign stocks, or a total of 40% in equities.
Some EPFs already have reached or exceeded that level. Masanori Tsuno, managing director of Frank Russell Co.'s Tokyo office, reported most of his pension fund clients already have received exemptions from the 5-3-3-2 rule, and most have completed asset allocation studies. At this point, his pension clients are averaging roughly 40% to 45% equities, and he expects such weightings gradually to increase.
Earlier this year, the Japan Bond Research Institute, Tokyo, provided evidence of continuing interest in diversification and use of investment advisers. According to the JBRI, 326 new accounts were given to investment advisers in the second quarter, just three less than the number for the same period last year.
Factors fueling that interest include the lowering of the guaranteed yield on insurers' general accounts to 2.5%, and a rule change allowing pension sponsors to count assets in general accounts as part of their required 50% in safe assets. The latter should boost the required 50% fixed-income holdings well beyond 50%, allowing funds to shift some of these "safe" assets to other investments.
In addition, weak returns also could heighten sponsors' interest in more diversification. Indeed, just recently, the Nihon Keizai Shimbun publication and the JBRI reported the total return on EPFs and TQPs averaged 4.09% in fiscal 1996 ended March 31, down 8.27 percentage points year-on-year. Difficult market conditions were cited as the cause.
These reasons are spurring interest in changing investment strategies. Indeed, data from JBRI show more pension sponsors taking advantage of the deregulation so far.
Among the funds reviewing their asset allocation/liabilities, making some kind of investment change, or saying they plan to, are: Japan Metallurgic Industry Association Pension Fund; Shimane Prefecture Building Contractors' Pension Fund; Yamaha Motors Pension Fund; Daihatsu Pension Fund; Ito Chu Employees' Pension Fund; fund of General Oil; Tokyo Kaijoo Pension Fund; Nihon Tekken Employees' Pension Fund; Kinki Coca-Cola Pension Fund; Saison Group Pension Fund; and the pension fund of IBM Japan Ltd.
Many hired managers, but others, such as IBM Japan, were reported to have undertaken asset/liability studies. IBM Japan's study is completed, but it could not be learned what it recommended.
According to the JBRI, the Kinki Coca-Cola Pension Fund has opted for more equities. Specifically, the fund plans to raise its weighting of domestic and foreign equities to 60% by March.