Japan’s newly elected prime minister Yoshihide Suga may seek to form an independent board to oversee the Government Pension Investment Fund (GPIF). However, experts said that it may not happen at least until his re-election in October next year.

Yoshihide Suga

The debate about whether the GPIF should have an independent board instead of coming under the oversight of the Ministry of Health, Labour and Welfare (MHLW) started several years ago, with many believing that the pension fund requires senior investment professional expertise and should be independent of political intervention, Shigeto Nagai, head of Japanese economics at Oxford Economics, told AsianInvestor.

Shigeto Nagai

The MHLW is responsible for all unsolved and pressing structural problems like social insurance reforms, healthcare systems, and labour market reforms. There are too many agendas for this ministry, and Suga may move to reorganise the MHLW once he establishes a stable administration, Nagai said.

“So in that [reorganisation] process [the question of] who will oversee GPIF could be one of the issues to be discussed,” Nagai said.

Suga succeeded Shinzo Abe, who became Japan’s longest-serving prime minister since assuming the premiership in 2012, following the latter’s resignation for health reasons on August 28. Suga will serve the remainder of Abe’s term, which ends in October next year.

For now, Suga will be busy with the challenges presented by Covid-19 and will be unlikely to put pension reform on the top of his agenda. That said, Suga may set out a framework or direction to show voters his determination to improve the oversight of the GPIF and to impress the public, he said.

With ¥162.09 trillion ($1.56 trillion) of assets under management, as of June, GPIF is the world’s largest pension fund. In its five-year plan, which comprised a mid-term strategy and a new policy portfolio, GPIF has mapped out a significant shift away from Japanese bonds. It has confirmed a reduction in its target allocation to 25% from 35% and an increase in the allocation to foreign bonds to 25% from 15%.

In recent years, it has increasingly moved into foreign and new asset classes, including emerging markets and a small position into illiquid strategies such as real estate, private equity and infrastructure, highlighting the need for sophisticated investment skills.

POLICY TO CONTINUE

Suga previously served as chief cabinet secretary under the Abe administration and had said during the ruling Liberal Democratic Party’s (LDP) presidential election that he would maintain policy continuity.

So the new administration should help bolster GPIF’s credentials in environmental, social and governance (ESG) investing and to encourage people to retire at an older age, in line with the policies of the former administration under Abe.

The continuation in policy is expected to be reflected in GPIF’s ESG efforts. The pension fund is arguably an international standard-setter for pension funds in the ESG space, thanks to former chief investment officer Hiromichi Mizuno.

“Suga succeeded Abe-san’s policies. The trend towards ESG and responsible stewardship is a global trend. I think he will support this kind of trend,” Nagai said.

Like most other advanced economies in Asia, Japan is facing an onerous pension challenge. People aged 65 and over make up 25% of Japan’s population and the proportion is projected to reach 33% by 2050. The new administration is also expected to continue to encourage people to work longer.

Plans to encourage people to delay drawing on their pensions until they are at least 70 years old will be maintained. When people retire later, the cashflows of the public pension will improve, and outflows will be postponed. That makes it easier for public pension funds to invest in illiquid assets, Konosuke Kita, director of consulting at Russell Investments in Japan, told AsianInvestor.

Japan’s retirement income system comprises a flat-rate basic pension; an earnings-related pension; and voluntary supplementary pension plans. The country was ranked D for its pension system on a scale of A to E, as the system has a major weakness in its sustainability, according to the 2019 Melbourne Mercer Global Pension Index.

The pension system can be strengthened by raising the level of contributions and this assets, announcing a further increase in the statuatory pension age as life expectancy continues to increase, among other things, according to the report.