Japan’s GPIF Must Cut Bonds, Change Governance, Ito Says

The world’s largest manager of retirement savings should reduce holdings of domestic bonds and create a board of directors to replace the current governance structure, an expert panel told Japan’s ruling party.

The 124 trillion yen ($1.2 trillion) Government Pension Investment Fund should decrease its allocation to Japanese government bonds and increase investments in other assets, Takatoshi Ito, chairman of a group advising lawmakers on pension allocations, said to a Liberal Democratic Party committee today in Tokyo. A new board of directors should take charge of decision-making and the law governing the fund must be changed if GPIF is unable to overhaul its leadership itself, Ito said.

“GPIF needs to review its governance and portfolio at the same time,” Ito told the LDP study group on economic revitalization and finance. “We must change who takes responsibility for the fund.”

Ito was discussing a report submitted last month by his government-appointed advisory panel that urged GPIF to review domestic bond holdings and look at investing more in overseas assets. The LDP needs to consider whether to table a bill to make the pension fund more independent of bureaucrats, amid pressure on GPIF to cover retirement payouts as the world’s oldest population ages.

“Lawmakers want to change GPIF so that it will adopt government policy and become a vehicle to buy stocks and other risk assets,” said Kyoya Okazawa, head of global equities and commodity derivatives at BNP Paribas Securities (Japan) Ltd. “They think Abe’s rating won’t fall below 40 percent as long as stocks rise and the economy is strong.”

Five Directors

A poll published by the Asahi newspaper on Dec. 7 showed Abe’s support at 46 percent, down from 49 percent on Dec. 2.

GPIF should have about five directors, compared to the one allowed by law now, Ito said. The law needs to be changed to make this possible, he said. The Ministry of Health, Labor and Welfare, which currently oversees the fund, won’t move fast to revise the legislation, so efforts are needed to ensure it happens, said Kozo Yamamoto, a lawmaker and member of the LDP committee.

Ito said in an interview last week GPIF needs to cut local debt holdings now. The fund should pare domestic bonds immediately to 52 percent of assets, its lower limit, he said.

Adjustments can be made within the fund’s current deviation limit, Teruyuki Katori, head of pensions at the health ministry, said today. When questioned whether that means he agrees with Ito’s recommendation to sell within deviation limits, Katori said “yes,” while adding he doesn’t want to give details on reallocation.

Inflation Target

GPIF President Takahiro Mitani said last week the fund must aim to keep assets as close to the target as possible.

Ito last month expressed faith in the Bank of Japan reaching its 2 percent target in about two years. GPIF needs to hold investments that provide higher returns, he said, as inflation erodes the value of the fund’s domestic bond holdings. That pits him against Mitani, who said on Dec. 4 consumer-price gains will probably stay between 0.1 percent and 1 percent. Mitani declined to comment on Ito’s statements today, GPIF spokesman Tomoyuki Hirao said by phone in Tokyo.

The nation’s consumer prices excluding fresh food, the BOJ’s gauge for its target, increased 0.9 percent in October from a year earlier, government figures showed Nov. 29. A gauge of prices that also excludes energy rose 0.3 percent.

Other Assets

GPIF and other public retirement funds should consider investing more in overseas assets, private equity, commodities, infrastructure and real-estate investment trusts, according to the pension panel’s final report on Nov. 20. The fund needs more independence from the health ministry, the report said.

“From the health ministry’s standpoint, changes will be hard to swallow because its emphasis has been on stability in pension management,” BNP Paribas’ Okazawa said.

The fund owned 71.9 trillion yen 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.

A move into alternative assets could begin in about a year, GPIF’s Mitani said in an interview last week. Ito wants changes to the fund’s portfolio to be made next spring, he said today.

GPIF plans to invest in overseas infrastructure as it seeks to diversify its holdings, two people with direct knowledge of the matter, who asked not to be named because the discussions are private, said this week.

The fund plans to make the investment in partnership with a foreign public pension fund, and the Development Bank of Japan will provide the GPIF with expertise in infrastructure enterprises, the people said. GPIF spokesman Tomoyuki Hirao and DBJ spokesman Keisuke Kuma both declined to comment.

Pension Returns

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. Japanese funds shrank 1.2 percent during the period, compared with a 0.9 percent increase in the U.S. and 16.5 percent growth in China, according to the report.

The government should allow GPIF to increase its staff budget and the fund should hire “star players” to manage the baby funds, or specialized investment pools, recommended in the pension panel’s report, Ito said today. The fund needs to hire more investment professionals, he said.

Japan’s Topix index of shares fell 0.7 percent to 1,242.23 today. The yield on the nation’s 10-year sovereign bonds touched 0.66 percent. The yen fell as much as 0.3 percent to 102.75 against the dollar.

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