Discussions inside Japan’s government to force smaller corporate pension funds to improve governance levels could restrict their ability to invest overseas. This risks exacerbating an existing lack of investment opportunities due to the funds' small average statures, say investment executives in the industry.

The possibility of new corporate pension governance rules emerged during a meeting for the workforce for corporate pensions and individual pensions at Japan’s Ministry of Health, Labour and Welfare (MHLW) on July 24

Participants at the meeting are understood to have raised the fact that some smaller pension funds haven’t fully prepared policy asset allocation or investment policies, set up investment committees or hired investment consultants as advisers, according to Konosuke Kita, director of consulting at Russell Investments in Japan. He is familiar with some of the attendees. 

While the MHLW has offered corporate pension funds guidelines over how to improve their governance, they are not currently enforced. The workforce discussed raising these guidelines to a legal requirement, which would effectively force local pension funds to follow them, said Kita.

Konosuke Kita

He noted it would be difficult for many funds to comply, were they required to do so.

“Small pension plans typically have fewer human resources; it is often just one investment professional,” he told AsianInvestor. “Such a person does often not have enough information and tend to blindly believe trust banks or life insurers without healthy suspicion.”

Kita added that there was no specific timetable, noting that the meeting was "just the beginning of the discussion".

Japan had 12,847 corporate pension funds as of July 1, according to the Pension Fund Association data. Approximately 40% of these funds have assets under management (AUM) of under ¥10 billion ($93.9 million), while 80% had below ¥50 billion in AUM.

MINIMUM AMOUNTS

If the MHLW’s workforce talks end up leading to new governance rules they could further stretch the investment abilities of Japan’s smaller corporate pension funds.

Many of the country's corporate pension funds employ a trust bank or life insurance company to conduct a variety of services, which includes investment management as well as liability calculations, benefit payments, administration of pension participants and retirees and custody. But the service providers typically offer their top-drawer products to larger clients.

Masaaki Sakakibara, director and wealth business country leader at consulting firm Mercer Japan, argued that Japanese asset managers and trust banks are generally good at introducing institutional investors to the most relevant investments for their size. However, he acknowledged that smaller pension funds typically have less investing options than their larger peers.

“Asset managers tend to set minimum AUM criteria [and as a result] smaller pension would not enjoy diversified portfolios. Some pension plans can only receive investment services from trust banks,” he told AsianInvestor.

In addition, “small and regional pension plans have limited access from trust bank and asset managers, who are not incentivised in terms of business opportunities,” said Sakakibara. “Mostly they don’t have a budget to hire investment consultants [to advise them on how to invest].”

The new rules being discussed, if implemented, could exacerbate these limitations, by forcing the funds to spend more of their time and resources to comply with the more stringent governance requirements. That would likely further reduce their capabilities and speed of execution, and leave them even more reliant on the services of trust banks and insurers. 

GAINING INVESTMENT KNOWHOW

One way some Japanese pension funds are currently trying to overcome the weakness of their size is to cooperate more with each other. It’s an approach that may become more vital under increased governance requirements.

Aichi-based Aisin Employees’ Pension Fund (Aisin) is one the larger side of Japan's corporate pension fund. Still, it uses placement agents to monitor investment trends for the ¥205 billion ($1.9 billion) in pension savings it manages, with Mitsui Sumitomo Trust acting as its domestic consultant and gatekeeper.

Hisashi Hatta 

Aichi-based Aisin Employees’ Pension Fund (Aisin), one of Japan's larger corporate pension funds with ¥205 billion ($1.9 billion) in pension savings, is helping lead these efforts.

Hisashi Hatta, the former director of investment and current investment adviser for the pension fund, told AsianInvestor that he had participated in a recent seminar that also included smaller peers, in which he discussed how corporate pension funds ought to cope with the changing cycle of the global economy.

“We see each other as colleagues, not competitors. In both formal and informal settings we seek to especially gain and discuss information on investment opportunities,” he told AsianInvestor.

Mercer’s Sakakibara argued that the best chance for smaller pension funds to improve overseas investing capabilities is to hire investment consultants, provided they can afford it, or to consider outsourcing the chief investment officer to a gatekeeper as their investment adviser and diversified portfolio provider.