A number of Japan’s largest pension funds are seeing their assets under management (AUM) shrink due to fewer savers and a growing number of payees.

It is a theme reflected strongly in the latest AsianInvestor rankings of the Asia-Pacific region's 300 largest institutional investors.

Of the pension funds included in our AI300, those based in Japan saw the highest combined year-on-year decline, with their combined AUM falling 1.09% to $6.916 trillion by the end of 2018.

Pension funds led an AUM decline across all Japanese asset owners in the AI300.

In addition to adverse market moves and high currency-hedging costs, the overall decrease in pension fund AUM reflects Japan's ageing demographics. In 2018, those aged 65 and over constituted 28.1% of the country's total population, marking a record high, according to the Statistics Bureau of Japan.

The productive-age population aged 15-64 totalled 75.45 million, or 59.7% of the entire population  – a percentage that has steadily declined since 1993.

That is lifting pay-outs, especially from corporate pension funds and mutual aid associations, but also means relatively fewer people are paying into pension funds, as one Tokyo-based adviser familiar with Japanese pension funds told AsianInvestor

“And since the amount that each pensioner receives is relatively larger than what each pension contributor pays in, the decrease of AUM has escalated past what investment performance can counter,” the adviser said.

GPIF STANDS OUT

The overall decline in Japanese pension fund assets came in spite of the Government Pension Investment Fund's strong performance. The world’s largest pension fund saw an AUM increase of 6.51% last year, according to AI300 data.

However, the only other Japanese pension fund to post an AUM increase was the Pension Fund Association for Local Government Officials, also known as Chikyoren, with a 1.58% improvement, the AI300 data shows.

In contrast, Japan Pension Fund Association and the National Mutual Insurance Federation of Agricultural Cooperatives, also known as Zenkyoren, saw AUM declines of 10.58% and 8.25%, respectively.

The Japanese public pension system has been working on a solution to counter the growing challenges posed by an extended AUM decline as the number of payees increase. It now uses a scheme similar to other developed countries that doesn't have fund assets, but collects contributions from contributors still active in the workforce and immediately pays benefit to retirees, the adviser explained.  

Most benefits each year are paid from the pension contributions and tax payments made that year. As a result, the large public pension funds are these days rarely decumulated; they just pay part of the benefits to retirees.

“Because they know that they don’t need to pay out much for a while, they can invest aggressively. But still, some public pension funds’ assets don’t move as expected,” the advisor said.

Also, some of Japan's smaller corporate pension funds are possibly facing their own regulatory challenges.