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Sleeping giants awaken

The chief spokesman for Japan’s Government Pension Investment Fund (GPIF) has once again called for a liberalisation of investment rules that will allow his investment committee to allocate greater amounts to international equities and alternative investment strategies. Speaking at the 2nd Annual Asian Pension Fund Roundtable1 in Tokyo, Noboru Terada spoke of the “bureaucratic atmosphere” caused by the government’s firm control of asset allocation policy.
Latest available figures from the GPIF show the size of the GPIF investment pool at over ¥70trn (e500bn). Over 90% of this sum is invested in domestic Japanese securities, with almost 70% in Japanese bonds. Increasing contributions and an additional inflow of assets as a result of daiko henjo (the return of assets from management by corporate pension plans to GPIF), will boost the size of the GPIF to an estimated ¥153trn by 2008. This doubling in size has positive implications for foreign asset managers, because although the proportionate allocations are not expected to change, the growth of the fund will ensure a larger pool for international bond and equity fund managers.

A veteran of the Nomura Research Institute and former director of the Japanese Pension Funds Association, Terada is well known in Japan for airing his frustration at the bureaucracy and lack of sophistication shown by government officials and institutions, domestic and foreign.
The GPIF is different from CalPERS in many ways, but driven forward
by Terada’s desire to emulate his US counterparts, the GPIF is gradually strengthening its risk management and research capabilities, and in the process is giving investment managers much tougher mandates and performance targets. Allocation to active managers is increasing very slowly, as is the exposure to international markets, mainly on the fixed income side.
Enhancing the risk/return trade-off brings a new complexity of investment programme which offers a challenge to the quality of management and staff. Terada’s personal view is that GPIF’s current management structure is not up to the task. “Most senior investment staff are ex government officials. The bureaucratic atmosphere is not helped by a lack of experience and a tendency to put off urgent problems.” He adds that while the GPIF has been compared to CalPERS or ABP, “one major difference is a lack of good governance. In order to put this in place, the current bureaucratic atmosphere of the GPIF should be changed to a positive and more professional atmosphere”.
Since the GPIF was established in 2001, there have been calls for the complete separation of the investment management process from the political process and, from 2006, the GPIF is going to be changing its status as an organisation. The new agency will be an incorporated company, but the new entity will still be subject to certain conditions set by the ministry of health labour and welfare, such as intermediate target returns and limits on overseas exposure.
Harald Conrad of the German Institute for Japanese Studies (DIJ) showed the extent of Japan’s funding crisis in the Asian context. By 2010, 22% of the population in Japan will be over 65, compared with 13% in Singapore, 8% in Thailand and about 5% in Malaysia and India. By 2025, it will be about 30% in Japan, but only 12% in Thailand and still less than 10% in Malaysia and India.
At the same time, labour will become relatively scarce. The chart above shows that, with retirement age for males at 55 in Indonesia, Malaysia and Thailand, there is a need for labour market and pension policies that encourage higher participation in order to create a more favourable economic dependency ratio.
Conrad commented that there is much that needs to be done to reflect the shift towards more individualistic lifestyles and consumption patterns as a result of globalisation. Family transfers as a source of retirement income are becoming less important. There is a widespread need for more comprehensive social safety nets to sustain internal cohesion and political support for globalisation. In other words, there is a need to embrace the global market, but there must be tangible benefits.
The structure of provident funds in some countries is working against this. Conrad says: “A number of Asian countries have pre-funded mandatory savings schemes that do not enjoy functional autonomy from government and have done a poor job of managing their investments. There is a need for policies and institutional and regulatory frameworks to ensure better investment returns.”
The DIJ research looks at the impact of capital flows increasing as the pool of developed world retirement savings goes in search of higher returns. The US will continue to have a younger population and will remain a capital import country, while Japan remains a capital exporter. Other Asian countries will probably profit from rising capital imports and increasing FDI, if capital flows are further deregulated and corporate governance can be improved.
1The Asian Pension Fund Roundtable is hosted by the Pacific Pension Institute and aims to develop a network of officials who will strengthen the performance and sustainability of public and governmental pensions

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