World’s Biggest Pension Fund Needs Autonomy Now, LDP Says

(Bloomberg) -- Japan must make its $1.19 trillion public pension fund independent of bureaucrats without delay so it can boost returns, the ruling Liberal Democratic Party said.

Lawmakers should pass a bill to give the Government Pension Investment Fund autonomy from the health ministry in the current parliamentary session and not wait until after the ministry completes a pension-fund review later this year, said Yasuhisa Shiozaki, the LDP’s deputy policy chief. The Diet sits from today through June 22.

“Some have suggested submitting this legislation during next year’s Diet but that’s beyond a joke -- it should be done this session,” Shiozaki said in an interview this week. “GPIF can’t really reform until it changes its organizational structure. There’s no reason to wait for the pension-fund review. They can start aiming for better returns now.”

An advisory panel handpicked by Prime Minister Shinzo Abe said in November that GPIF should reduce bond holdings and be made more independent as it seeks higher returns to fund pensions for the world’s fastest aging population. Investors are focused on what happens next, with the health ministry due to carry out a five-yearly review of the financial position of large pension funds under its control by the end of 2014.

Press Ahead

“Japan’s public fund management will also change a great deal,” Abe said in a keynote address at the World Economic Forum in Davos, Switzerland on Jan. 22. “We will press ahead with forward-looking reforms, including a review of that portfolio. The GPIF will contribute to investments leading to growth.”

GPIF, which is registered as an independent administrative institution, should become a semi-governmental corporation to loosen ties with the health ministry, Takatoshi Ito, who headed the government advisory panel, told an LDP committee Dec. 12. The Ministry of Health, Labor and Welfare oversees GPIF’s budget, management and investment strategy.

“The minister in charge holds the ultimate responsibility for investment,” the panel wrote in the Nov. 20 report. “Consideration should be given so that such governance structure will not undermine the independence and creativity of the funds.”

The world’s biggest pension fund should have about five directors, compared to the one allowed by law now, and legislation needs to be changed to make this possible, Ito said to the committee last month.

Restrictions

GPIF’s structure creates restrictions on the number of employees, wage levels and expenses, the advisory panel said, recommending more flexibility in these areas. Investment calls should be made by a board of full-time experts rather than solely by the GPIF president, the panel said.

Changes in the law governing GPIF should be completed as early as the fall of 2014, Ito said last month. The health ministry won’t move quickly to revise the legislation, so efforts are needed to ensure it happens, Kozo Yamamoto, an LDP lawmaker, said during the December committee meeting.

The ministry is due to submit forecasts for pension plans’ financial positions this year. The review, which takes place every five years, considers factors such as benefit costs and rate of contributions from workers. The 2009 report was submitted in February of that year.

Low Returns

GPIF is under pressure to reduce its 60 percent allocation to government debt amid concern the Bank of Japan’s efforts to ignite inflation will erode the value of its bonds. Returns for Japan’s biggest pension funds were the lowest among 11 countries between 2007 and 2012 in local-currency terms, according to a Towers Watson & Co. report that tracks the world’s 20 largest pools of retirement savings.

GPIF President Takahiro Mitani said Dec. 4 the Bank of Japan won’t reach its inflation goal of 2 percent by 2015. Mitani also said that the fund should aim to keep holdings as close to its core portfolio targets as possible and any changes to this strategy would require consultation with ministry officials. Advisory panel head Ito said Dec. 6 the fund needs to start selling bonds now.

The fund owned 71.9 trillion yen ($689 billion) of local bonds as of Sept. 30, making up 58 percent of its assets, according to its quarterly report. Japanese stocks accounted for 16 percent, followed by 13 percent in overseas equities, 10 percent in foreign bonds and 2.1 percent in short-term assets.

“GPIF has the world’s attention,” Shiozaki said, adding that enacting the bill is one of the most important tasks facing lawmakers. “There’s no reason to wait.”