Japan corporate pensions face pressure from planned reforms

Japanese corporate pension funds have come under scrutiny as the government pushes to increase the amount of local capital in domestic financial markets.

With new regulations in the works, some industry participants believe the government does not understand some of the key challenges by corporate pensions, based on whether they are defined benefit (DB) or defined contributions (DC) schemes.

A current government aim is to convert Japan into an “Asset Management Nation,” which would further the country’s ambitions to become an increasingly attractive financial market and a leading asset management center.

Konosuke Kita,

Russell Investments

To achieve this, the Cabinet Secretariat, a top policy coordination body, and Japan’s Financial Services Agency (FSA), are separately pushing reforms for corporate pension funds, according to the report “Plan to Realize an Asset Management Nation” released in December.

Corporate pensions shifted from equities to fixed income at the turn of the century for derisking purposes, and they now hold the potential to boost Japan’s stock market, some believe.

“The average equity allocation among Japanese corporate pensions is now roughly 20-25%, and they have especially been decreasing the domestic equity allocation. The government is trying to change this trend,” Konosuke Kita, director of consulting at Russell Investments in Japan, told AsianInvestor.

FEELING PRESSURE

Kiyoshi Iwashina,

Noritz Corporate Pension Fund

The Japanese population is considered to have most capital – some ¥2,000 trillion ($13.3 trillion) – not invested and sitting in savings or deposits.

The Cabinet Secretariat wants to see a large share of that capital go into the domestic stock market.

Corporate pensions have noticed the pressure, according to Kiyoshi Iwashina. He is chief executive officer and chief investment officer at Noritz Corporate Pension Fund, a DB scheme.

“The Japanese public pension scheme is not in an ideal situation because of the decreasing population. Therefore, the government wants to accelerate the activities of private, corporate pension plans so they constantly push for such type of polices recently,” Iwashina told AsianInvestor.

INTENSE DISCUSSIONS

One of the government’s reform objectives is increased disclosure of corporate pension funds’ investment performance to the public.

Iwashina sees this objective as an “ideal” since it would encourage corporate funds to become more sophisticated in their investment practices, thereby raising their earnings.

He believes the realities of operating corporate pension funds will challenge their ability to make such disclosures.

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Although the Cabinet Secretariat and FSA want DB corporate pensions to shift gradually to equity allocations, the pressure has somewhat decreased after DB schemes explained themselves during intense discussions.

Government bodies may have underestimated the quality of portfolio management and strategic asset allocation among DB corporate pensions, Kita said.

“The government now better understands the current portfolios of DB corporate pensions, and most of the DB funds - the ones that have been managed with a high fiduciary duties level - will not have to change their investment style and activities that much,” Kita said.

However, some smaller and less sophisticated DB funds will be pushed by the government to increase their use of “commingled investment vehicles” provided by Japan’s Pension Fund Association (PFA), a federation of employees' pension funds.

“The government report heavily advises corporate pensions to use PFA’s commingled vehicles for investment sophistication. Although multiemployer corporate pension funds [already] exist in Japan, the report does not recommend these multiemployer plans,” Kita said.

DIFFERENT SITUATIONS

The situation differs from one individual corporate pension plan to another, Iwashina pointed out. Careful discussion will be needed on what constitutes effective pension investment reform.

“If the government continues to promote policies that are not in line with the actual situation, it could lead to an acceleration of the switch from defined benefits (DB) schemes to defined contributions (DC) schemes by companies that are displeased with the operational costs,” Iwashina said.

Compared to corporate DB schemes, DC schemes are considered to generally have much lower management quality, Kita explained. Some believe the management of DC schemes needs to be improved.

“The DC schemes in Japan started 20 years later than in the US, but still the allocation to cash or deposits is roughly 40 or 50%. Most people believe this allocation should be shifted to equities or balanced funds, and that there is a need to accelerate the target date funds as a default option in the DC area,” Kita said.

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