Japan government pushes to improve corporate pension operations
A professionalisation push is being advocated for Japanese corporate pension funds. The need stems from the challenge that fund CIOs or executives are often recruited among staff in each corporation rather than among people with investment or asset management capabilities.
“Corporate pension fund CIOs or executives assigned to corporate pension funds often do not have enough relevant investment experience,” Keiichi Aritomo, executive director of FinCity.Tokyo, told AsianInvestor.
Although he does not want to overgeneralise among about 13,000 corporate pension funds, the Japanese corporate culture promotes generalists who are then placed in various roles throughout their career in one corporation, rather than specialists.
“The people who have the investment capabilities do not exist in the ordinary Japanese corporation, only in the financial industry,” Konosuke Kita, director of consulting at Russell Investments in Japan, told AsianInvestor.
As the current government aims to convert Japan into an “Asset Management Nation”, one focus is to reform asset ownership by improving capabilities of asset owners, and corporate pension schemes in particular. This would further the country’s ambitions to become an increasingly attractive financial market and a leading asset management centre.
“Corporate pension schemes as a whole need to work on capability building, establishing career paths for the CIO role, and improving supervision of the funds’ asset management function to optimise risk adjusted returns,” Aritomo said.
FinCity.Tokyo is a financial promotion organisation with a mission to upgrade Tokyo's financial ecosystem. Aritomo is also a co-founder and board director of the Consortium for Japan International Asset Management Center (JIAM).
MORE SUPERVISION
Overall, Japan’s government is expected to increase the supervision of corporate pension schemes.
For now, the Ministry of Health, Labour and Welfare of Japan (MHLW) is emphasising the safeguarding of the custodian function of corporate pensions, rather than the asset management function.
“While operational risk management of corporate pensions is important, risk-adjusted return optimisation is equally important. The corporate pension funds should be supervised by the FSA, just like asset management companies,” Aritomo said.
Following the policy plan released in December, the MHLW has initiated the collection of data on corporate pension portfolios and performance.
“The MHLW will conclude about the practical method to publish by the end of year 2024,” Kita said.
TALENT NEEDED
Beyond the current lacking capabilities among corporate pension managers, the talent pool of people with qualifications that match an asset owner CIO role is limited.
A major factor is the attractiveness of choosing this career path for investment and asset management professionals.
Among the about 13,000 corporate pension schemes in Japan, a lion’s share — above 90% — only manages a portfolio that is up to $200 million in assets under management (AUM). For instance, among defined benefit schemes, 90% have assets worth under JPY¥10 billion ($67 million).
This means that there is a giant leap up to the relatively fewer but larger corporate pension funds with an AUM above ¥100 billion ($670 million), where about 70% of these are more professionalised by using investment consultants, Kita pointed out.
“We must upgrade capabilities of corporate pension funds, as opposed to assigning or rotating somebody [who is] semi-retired. We must give more social recognition to the importance of the role of the institutional investor within corporations,” Aritomo said.
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While some Japanese manufacturing corporations are seen successfully recruiting younger professionals from their treasury departments, Aritomo suggests joint investment management solutions that can improve investment performance for small corporate pension schemes.
However, he highlighted a hybrid version of the outsourced CIO (OCIO) model, stopping short of a fully outsourced investment office assuming complete responsibility for the portfolio.
“Trust banks and consultancies offer OCIO models, but we advocate a capability-building model instead of dumping all tasks to an external manager. And co-investment from the external partner is very important to make sure that all are in the same boat with capital at stake,” Aritomo said.
In the government’s new policy plan “Plan to Realize an Asset Management Nation” released in December 2023, Japan’s Financial Services Agency (FSA) notes the potential for increased performance via outsourcing, both through outsourcing of investment capabilities for asset owners, and outsourcing of the mid-and-back-office functions for small asset management teams.