Japan’s National Pension, the World’s Largest, Faces Reform Pressure

(December 26, 2010) – The Government Pension Investment Fund (GPIF), the world’s largest at US$1.4 trillion and thus first on the aiGlobal 500 listing of the world’s largest asset owners, has come under fire from an Organization for Economic Co-operation and Development (OECD) report. 

The report, focusing on both governance and investment strategy issues at the GPIF, comes after a set of 2006 reforms at the fund. “While much improved,” the report states, referring to previous reforms, “the new governance structure still falls short of international best practices and in some aspects does not meet some of the basic criteria contained in OECD recommendations.” 

Amongst the report’s complaints relating to governance, the GPIF still is not required to put its investment policy in writing, and there remains uncertainty surrounding the issue of whether the fund’s Board sets – or simply recommends – the investment policy. Also concerning to the OECD is the fact that the responsibilities of Chairman of the Board, Chief Executive Officer, and Chief Investment Officer all coalesce in one man – currently Takahiro Mitani. “The lack of a clear separation between operational and oversight roles within the fund is a major problem that goes against OECD recommendations,” the report states before recommending that the roles be distinct. Furthermore, the report asserts, a more robust staff should be hired. 

On the portfolio side, the OECD also sees problems despite the 2006 reforms. The current GPIF portfolio is both biased towards domestic investments – 67% of its holdings are in Japanese bonds, 11% in domestic equities – and conservative investments – all holdings are in equities, bonds, or cash – that have left the fund trailing other national pension funds with more aggressive strategies. Such an allocation, according to the OECD report, “does not seem to have been set with any consideration for the liabilities of the public pension system — which the OECD recognizes as important in developing investment strategies and fund objectives.” And, with recent pressure to move the long-term expected rate of return from 3.2% to 4.1% per annum, no changes have been made to this staid investment approach, leading the OECD to claim that “the GPIF does not seem to have any mechanism for even trying to generate additional returns.  

For a list of the world’s 500 largest asset owners, click here.