TOKYO — The global move toward defined contribution plans and away from defined benefit plans could bypass Japan if three steps are taken, said Masaharu Usuki, principal and senior pension economist for the NLI Research Institute, Tokyo.
Mr. Usuki said the switch might be avoided through risk sharing between employers and employees, risk hedging in the market, and cost and risk bearing by the government. He was among the speakers at the Global Pension Symposium 2007 held last month in Tokyo. The symposium was sponsored by Pensions & Investments and Nomura Securities.
He noted, for example, that benefit protection is “softer” in Japan than in the United States. Corporate executives may reduce DB benefits when a company is in financial difficulties and labor and management agree to the benefit reduction, Mr. Usuki said.
Yuji Kage, managing director of Japan’s Pension Fund Association, Tokyo, agreed. “Because of the flexibility (in Japan), the DB scheme is maintained,” he said. In the United States, Mr. Kage noted, companies must deliver on the retirement promise they made to employees. In Japan, however, “everyone must share the pain.”
Mr. Usuki also noted many companies are converting their traditional pension plans to cash balance plans, which are still defined benefit systems but allow for risk sharing between the employer and employee.
Mr. Usuki also believes Japanese pension funds should use such risk hedges as liability-driven investing, but only if it is coupled with fair value accounting. And finally, he said, the Japanese government can help maintain defined benefit plans by allowing for flexible contribution schedules and reversions.
(New research from Greenwich Associates, Greenwich, Conn., shows the percentage of Japanese plan sponsors offering defined contribution plans was flat between 2006 and 2007 — at 20%. Retirement assets held by DC plans totaled 4%, the same as two years ago.)
Toyokiro Ueda, former managing director of the Mitsubishi Electric Corp. pension fund, Tokyo, said the future of DB plans remaining in Anglo-Saxon countries is nil. “In Japan, yes,” he added. He is now chief executive consultant at MU Trust Consulting (Shanghai) Co. Ltd., Tokyo.
Masashi Takizawa, chairman of the defined contribution plan subcommittee and president of the Pension Fund Association, Tokyo, said Japanese defined contribution plans are different from 401(k) plans in the United States. Among the differences: Participants can’t change their DC plan investments; initial participant training sessions are mandatory; and most employers are not doing any ongoing investment education.
During a panel discussion on new investment technologies, Hideo Kondo, asset management director of the Dainippon Ink Pension Fund, Tokyo, said there is a “higher degree of understanding that is required” of pension executives these days.
For example, “how to have the commodity exposure … is something I think about every day,” Mr. Kondo said. He said his pension fund has been using a foreign exchange overlay for years. “But it is changing,” Mr. Kondo said. “Now we use a total return swap.”
Hirofumi Hayashi, a managing director at Nomura Securities Co. Ltd., Tokyo, said Japanese investment executives only lately have begun talking about hedge fund replication. He said tests show this strategy produces higher returns than those available from hedge funds of funds.
Experts from other countries
In addition to a host of Japanese speakers, the conference featured pension fund experts from other countries — Sweden, the United States and the United Kingdom, for example — discussing how pension executives in their countries handled issues facing their Japanese counterparts.
For example, Kerstin Hessius, chief executive officer of AP Fonden 3, the third Swedish National Pension Fund, Stockholm, talked about fund governance. She said the chance that politicians can influence the pension system has been reduced in Sweden by having four funds, rather than one. AP3 has 228 billion kronor ($35 billion) in assets
“We’re not allowed to cooperate” with each other on investing, Ms. Hessius said. “There’s a healthy competition” among the funds, she added.
The negative side of an independent system is “no one is protecting the system,” so Ms. Hessius said she feels she has to be its “protector.”
Throughout the two days, pension fund executives shared their successes and frustrations.
Nobuki Kawahara, managing director and pension fund director of the Toshiba Pension Fund in Tokyo, said with only three pension investment staffers and 40 portfolios, “we’re coming to a limit” on how much more work the group can do. He also said the fund had made some investment changes in 2007 because “we were not successful in active management” in 2006. He didn’t elaborate on what changes were made.
Manfred Lehmann, retired vice president of strategic planning and treasurer of Nestle USA, Glendale, Calif., said U.S. corporate pension funds are cutting staff. Many no longer have chief investment officers, he said, so the treasurer manages the pension fund “on the side.”
Mr. Lehmann said as pension funds like Nestle have added portable alpha strategies, their custodial banks “had to reinvent systems … You take everything apart and put it back together … differently.” Nestle officials worked with Northern Trust Co., Chicago. It was “a painful path to get there, but we’re there.”
In an interview with Pensions & Investments outside the conference, Ryu Jubishi, executive managing director of the ¥140 trillion ($1.24 trillion) Government Pension Investment Fund, Tokyo, said 2008 is the final year the GPIF will be getting contributions from the government. The world’s largest pension fund has ¥90 trillion invested in the markets now, ¥30 trillion in government bonds that will be held to maturity and ¥20 trillion held by the Ministry of Finance until next year.
Mr. Jubishi said fund officials have some concerns about foreign and domestic equities after several years of good performance. But no major changes are expected until 2010, when the Ministry of Health next evaluates the fund.
Evaluations occur every five years, when GPIF officials are given an expected return. The current return is 2.1%, but Mr. Jubishi said fund officials want to achieve a nominal 3.2% return with a risk level about the same as the domestic debt level.
Staff manages ¥6 trillion internally, part of the fund’s passive domestic bond portfolio, he said. All other assets are managed externally. The GPIF’s target portfolio is 67% domestic fixed income; 11%, domestic equities; 9%, foreign equities; 8%, foreign bonds; and 5%, short-term investments, Mr. Jubishi said.
