Japan’s Government Pension Investment Fund Suffered Sharp Drop in 2010 FY

(July 7, 2011) – Japan’s mammoth public pension plan, the largest institutional investor in the world, took an investment loss of about ¥300 billion ($3.6 billion) in the 2010 fiscal year ending March 31, 2011, Nikkei.com has reported.

The Government Pension Investment Fund (GPIF) blamed the loss on the weakness of domestic stocks and foreign bonds tied to the yen’s prolonged strength and to fallout from the March 11 earthquake.

Total assets under management dropped 5% from the end of the 2009 fiscal year to ¥116 trillion ($1.4 trillion). About ¥97 trillion ($1.16 trillion) of that figure was invested in the market. Despite the drop, the pension fund remains larger than many countries’–including Canada’s–GDP.

The principal reason for the fund’s anemic performance was the strength of the yen, which ate into the pension fund’s strong returns from foreign equities. Overall investment yield in fiscal year 2010 sank to minus 0.25%–a far cry from the fund’s 7.91% return the year before. The fund’s return in fiscal year 2009 topped ¥9.18 trillion ($110.3 billion), the highest return ever generated by the GPIF.

The news of the fund’s weak performance prompted fears within Japan that the GPIF would be unable to support the coming wave of retiring beneficiaries. The GPIF announced July 6 that it had sold $59 billion worth of domestic bonds and foreign equities in the 2010 fiscal year to cover a shortfall in pension payouts, its second straight year it was forced to do so, Reuters has reported.

“A single-year minus will not have an immediate impact on pension benefits,” a senior GPIF official said of the investment loss, Nikkei.com reported.

Hit hard by the 2008 market collapse, pension funds throughout the world are embracing riskier asset classes to boost returns in anticipation of the retirement of their rapidly aging beneficiaries. Japanese pension plans in particular are increasingly turning to hedge funds to shore up underperforming asset levels, aiCIO has reported.