Japanese corporate pension funds — with a combined $800 billion in retirement assets for big defined benefit plans and multiemployer plans covering small and midsize firms — have remained wallflowers at that equity party.
Those corporate funds have sold into the rally, with the average allocation to domestic equities dropping to 16% of total portfolio assets at the end of March, from 34% roughly a decade before, noted Toru Kubota, a Tokyo-based senior investment consultant with Towers Watson & Co., at a recent conference in Singapore.
After years of sitting on unrealized losses on their holdings of Japanese stocks, many corporate pension funds have used this year's rebound as a good opportunity to take profits, said Invesco's Mr. Sato.
For a big chunk of the roughly $300 billion in retirement assets for multiemployer plans, a government-mandated restructuring program is contributing to that “risk-off” stance.
By government decree, multiemployer funds that don't meet specified funding levels will be merged into the $1.21 trillion Government Pension Investment Fund over the next five to 10 years. As a result, many of those roughly 500 funds — which according to Tokyo-based investment consulting firm Rating and Investment Information Inc. had an average domestic equity allocation of 21.7%, topping the 14.1% average for big corporate DB plans — are trimming risk now from portfolios to bring them in line with the GPIF's more conservative asset allocation mix.
(That gap might become easier to bridge after November, when a panel advising Prime Minister Abe is expected to recommend the GPIF and other big public funds shift from portfolios dominated by Japanese government bonds in the direction of a more endowment-like approaches to asset allocation.)
For the roughly $500 billion in corporate defined benefit plan money, the road to a more “risk-on” asset allocation approach could be a long one, market veterans said.
Money managers and consultants note that two decades of capital market misery have left corporate pension funds effectively institutionalizing a “risk-off” stance.
Against the backdrop of deflation and the Japanese stock market's long downtrend, corporate pension plans have slashed their targeted annual returns to as low as 1.5% now from more than 5% a decade ago — a goal that pretty much rules out the need for heavy allocations to equities, noted Invesco's Mr. Sato.
After years marked by a spate of sharp drawdowns in the value of their pension assets, many companies have opted to shoulder the heavier pension contributions a conservative investment strategy demands as less disruptive to their business plans than their previous, more aggressive investment approaches proved, said Akihiko Ohwa, former manager of the IBM Japan Pension Fund who now serves as an instructor at Waseda University Graduate School.
Japanese corporate pension funds remain focused on lower volatility assets — seemingly “happy to contribute to fill funding gaps rather than to invest into higher return assets,” agreed Christoph Hofmann, global head of distribution with emerging markets debt boutique Ashmore Group PLC, London. “As such, the Japanese pension market continues to be a fixed-income market and its appetite for equity risk assets seems pretty limited.”
Many observers say the new bounce in the Japanese economy's step under Mr. Abe would have to persist for a considerable period of time to change the mind sets of corporate pension executives.
A combination of heavy unfunded pension obligations and core business losses has left a number of Japan's biggest companies leery of taking a lot of pension-related risk, noted Koji Ezura, Tokyo-based head of institutional sales with Nikko Asset Management Co. Ltd. Only when their core businesses recover are they likely to allocate more to riskier growth assets, he said.