The Pension Fund Association (PFA) has cut five foreign managers and is increasing its ratio of funds managed in-house, while remaining committed to expanding its external managers. The moves were announced as part of the PFA’s results for fiscal year 2010, which revealed a total pensions shortfall of ¥961 billion ($12.5 billion).

Its pension liabilities were down 2.3% year-on-year to ¥10,971 billion, while its net assets, consisting mainly of operating assets, slid 5% to ¥10,105 billion. The association had revenues of ¥127.4 billion in reserves returned from those leaving the system early, and charges levied from funds that were dissolved in FY10. However, expenditures for pensions and one-time payouts grew to ¥593.9 billion. The increasing maturity of the market has seen a consistent outflow of funds since 2006.

In addition, operating losses from asset management were ¥54.3 billion. Combined with the fund outflow, this brought net assets down ¥520.6 billion within the fiscal year. The balance at the end of FY09 was ¥10,531.1 billion. With the growing maturity of the fund, the total could drop below the ¥10,000 billion threshold in FY11.

The 2010 operating yield of -0.52% is roughly the same as the -0.26% for public pension funds overall. Thus, there was no significant impact on the “daiko” portion for the return of funds managed on behalf of the government. Still, this was well below the average guaranteed yield on the ‘plus-alpha’ portion of the portfolio, hurting the reserve situation.

The PFA stresses that the plus-alpha portion includes many who switched over on the assumption of previous high guaranteed yield levels. Reserve levels at 91% are still higher than the 76.5% at the end of 2008 following the Lehman shock, but have remained below 100% for four successive years. This compares to 111.6% in 2005 and 113.4% in 2006.

The PFA is increasing the ratio of funds managed in-house. Of the ¥10,058.4 billion in operating assets, the fund managed around 40% on its own. It also began investing actively in foreign bonds, including launching a new in-house fund for emerging markets.

Foreign bonds managed in-house came to ¥595.6 billion, nearly triple the total of one year earlier, in a signal of a clear commitment to greater in-house involvement in foreign bonds. The PFA says it will continue to expand its foreign bond investment, in order to improve the efficiency of its cash management and forex risk management. The earlier two foreign bond funds used as their benchmark the Citigroup World Government Bond Index ex-Japan, which is commonly used by corporate pension funds.

The PFA cut the number of external managers of domestic bonds by one from last year to six firms and domestic stocks by one to 13 firms. It also cut one alternative fund manager.

Regarding foreign stocks, it sought to expand its external managers in order to improve management efficiency. It employed only two new managers in 2010, AllianceBernstein and Chuo Mitsui Trust & Banking, both for domestic stocks. In contrast, it cut five managers: Mitsubishi UFJ Trust (domestic bonds), Chuo Mitsui Asset Trust (domestic stocks), State Street Global Advisers (foreign stocks), UBS Global Asset Management (foreign stocks), and Nomura Asset Management. - Nenkin Joho