Corporate Japan might take lesson from GPIF

The Government Pension Investment Fund's recent shift to more aggressive investment targets could be followed soon by significant reforms to Japan's corporate retirement system.

The eighth annual Global Pension Symposium, sponsored by Pensions & Investments and Nomura Securities in Tokyo Nov. 11-12, began with calls for policy changes to help corporate defined benefit and defined contribution plans become sturdier pillars of Japan's retirement system.

The economic implications — direct and indirect — of pension reforms have given efforts to bolster the system a political tailwind from the government of Prime Minister Shinzo Abe. He swept to power two years ago on the strength of his pledge to do anything needed to lift Japan's economy from a stubborn deflationary spiral, even as it contends with a mid-year recession.

With the ever-increasing burden on Japan's public pension plans, and retirement benefits accounting for as much as 30% of consumption outlays in some parts of the country, “the role of corporate pensions has to expand,” Kiyoshi Murase, president of Japan's Pension Fund Association, told an audience that included 238 representatives from corporate defined benefit and defined contribution plans.

In separate presentations, Mr. Murase and Koji Kakigi, chairman of the pension subcommittee of the Japan Business Federation’s committee on social security, detailed progress of ongoing talks with Japan’s government on topics such as expanding limited tax treatment at present for DC plans.

While a growing number of Japanese companies have added defined contribution plans for their employees or switched to DC from DB over the past year or two, monthly contributions are currently limited to ¥55,000 ($473) for firms that only offer DC and half that total for firms that offer a DB plan as well. That constraint “should be abolished,” said Mr. Kakigi.

Some observers expect that monthly ceiling to be doubled or tripled in the coming months.

Other areas of reform under consideration in Japan include taking steps to promote portability, to reflect the fact that fewer employees now stay with one company throughout their working life, while accommodating the growing number of Japanese working overseas and foreigners working in Japan.

Conference attendees heard from representatives of the ¥126 trillion GPIF about the Tokyo-based giant's Oct. 31 decision to lift its target allocations for domestic equities and foreign equities to 25% apiece from 12% each, while slashing its domestic bond target to 35% from 60%, to meet more aggressive return targets.

Mr. Abe's lieutenants have made it clear this is the direction in which they want the GPIF to move.

While the perils of moving into higher-risk assets were acknowledged, speakers at the symposium contended that institutional investors increasingly will be flexing their muscles in ways that can improve their own operating environments.

With traditional masters of the global financial universe, such as commercial banks and investment banks, being hamstrung now by regulators, the next 50 years will see pension funds and sovereign wealth funds taking their places at “policy tables, as well as investment tables,” predicted Charles Dallara, the Washington-based executive vice chairman and chairman of the Americas for Partners Group, a Zug, Switzerland-based private markets firm.

A growing focus on corporate governance and investor activism is one example of that trend that's come into the spotlight in Japan.

For the opening keynote speech on the symposium's second day, Brian K. Heywood, CEO and founding partner of Seattle-based Taiyo Pacific Partners, said the “engagement investing” his firm focuses on to foster shareholder-friendly and profitable Japanese companies could help close the gap that has left their returns on equity at half the level of companies in Europe and roughly a third of U.S.-based companies.

In March, when the GPIF revamped its active domestic equity manager lineup, it awarded Taiyo Pacific Partners an initial mandate of roughly $50 million.

Sadayuki Horie, a senior researcher at Nomura Research Institute Ltd., was tapped this year as deputy chairman of the GPIF's investment committee.

In a separate panel discussion, Mr. Horie said the GPIF's decision in March to employ the JPX 400 index, a new benchmark that focuses on companies that deliver high return on equity, could have significant, positive ripple effects.

As Japan's anchor institutional investor, GPIF'S selection of a benchmark that can exert pressure on companies to take greater interest in capital efficiency and productivity could prove “very important” for long-term equity investment, Mr. Horie said.

If the promise of a return to inflation helped cement the GPIF's decision to more than double its targeted allocation to stocks, slash bonds and begin investing in alternatives such as private equity, real estate and infrastructure, corporate pension executives at the symposium were less inclined to move out along the risk-reward curve.

With most corporate funds having lowered their investment return target to between 2% and 2.5% in the past year as the yield on the 10-year Japanese government bond drifted down to roughly 0.5%, pension executives said they don't feel the need to take on more equity risk — after a decade or more of slashing their exposure to domestic stocks.

Meanwhile, if the GPIF is just making its initial investments in alternatives, many corporate pension funds in Japan already have allocations of between 5% and 20%, and are considering further allocations as they position themselves to deal with a rising interest rate environment.

On a panel discussion about investing in infrastructure and real estate, Kengo Torii, group manager, investment group for the ¥420 billion pension fund of Kariya-based Denso Corp., said his fund established a 5% target for alternatives from 2013. To date, the fund has allocated roughly ¥5 billion to private equity investments, and is making final decisions now on its first allocations to real estate and infrastructure, he said.

Mr. Torii said he's looking to raise his fund's alternatives exposure to 10% “in the near future,” with a focus on private equity, real estate and infrastructure.

On the same panel, Tohru Morohashi, investment manager of Kyoto-based Omron Corp.'s ¥1.15 billion pension fund, said his firm's allocations to alternatives came to 20%, with a 7 percentage point limit within that to non-liquid alternatives — including infrastructure, real estate and private equity — and the remaining 13 percentage points is for liquid alternatives.

With Omron's pension fund poised to go to net outflows in about three years, Mr. Morohashi said he has favored listed real estate and infrastructure, to remain as liquid as possible while still aiming for returns of 5% or so that Japanese government bonds simply can't deliver. n