OECD called on the 140 trillion yen ($1.4 trillion) Government Pension Investment Fund, Tokyo, to revamp its investment strategy and corporate governance structure to meet its long-term performance goal.
The fund has been falling behind some of its smaller peers in investment strategy and corporate governance best practices, according to a paper from the Organization for Economic Co-operation and Development. For example, the fund is not required to draft “a detailed written statement of investment policy,” according to the paper.
GPIF currently invests 67% of its total portfolio in domestic bonds, 11% in domestic equity, 8% in overseas bonds and 9% in overseas equities. The remainder is in cash. According to the OECD paper, the strategic asset allocation of the fund “does not seem to have been set with any consideration for the liabilities of the public pension system.”
While the long-term rate of return for the fund recently increased to 4.1% from 3.2%, there were no changes to the fund’s strategic allocation, which does not allow alternative investments or the use of derivatives except for hedging purposes, according to the paper.
On corporate governance, the OECD recommended that operational and oversight functions should be separated. For example, the GPIF chairman in principle also is board chairman, CEO and chief investment officer. “The lack of a clear separation between operational and oversight roles within the fund is a major problem that goes against OECD recommendations,” according to the paper.
The paper is co-authored by Fiona Stewart, principal administrator in the OECD’s financial affairs division, and Juan Yermo, the organization’s head of private pensions unit.