GPIF Needs Wage-Based Return Goal, Less Bond Focus: PanelAnna Kitanaka, Yoshiaki Nohara and Shigeki Nozawa
The world’s largest pension fund should look to beat wage growth when setting investment goals and no longer needs to focus on domestic bonds given quickening inflation, a Japanese government advisory panel said.
The 128.6 trillion yen ($1.26 trillion) Government Pension Investment Fund should seek yearly returns of 1.7 percent plus the rate of pay increases for workers, according to a draft report from the committee formed to help the health ministry decide on economic assumptions for investment targets. Using the group’s preferred scenario, that implies a 4.2 percent return goal. While maintaining a call for safe and efficient investment, the committee signaled it may be time for GPIF to shift away from Japanese sovereign debt.
“Pension payments are correlated with wages, so it’s natural for the target to be an additional return over wage growth,” the panel said in its draft report. “In times of deflation, domestic bond-centered investment was safe and efficient, but with the planned shift to a moderate inflationary environment, there’s no need to focus on local debt anymore. GPIF should become more forward-looking.”
The panel’s implied target, which amounts to a 0.1 percentage point increase on GPIF’s current goal, comes amid mounting pressure on the fund to take more risk as pension payouts for the world’s oldest population swell. The proposals add to calls for GPIF to reduce its dependence on bonds as Prime Minister Shinzo Abe and the Bank of Japan seek to spur consumer price gains that would erode the debt’s value.
The 10-person committee discussed its proposal to the health ministry, which oversees public pension funds including GPIF, at its 16th meeting today. It will gather again to finalize the report details, panel head Naoyuki Yoshino said today. A separate 21-member advisory group will then use the recommendations to create a financial review of the funds and outline changes, according to a ministry document.
The ministry has no plans to deviate from the panel’s recommendation for a target return of 1.7 percent plus the rate of real-wage growth, Kotaro Mori, an official at the department that oversees GPIF, said in an interview today.
“I think pension funds are moving in the right direction because they have been too risk averse,” said Masaru Hamasaki, a senior strategist at Tokyo-based Sumitomo Mitsui Asset Management Co., which oversees about 11 trillion yen in assets. “It’s not a bad thing they are going to take risk, but we need to be ready for higher volatility in assets.”
The Topix index of stocks climbed after the committee meeting began, with the gauge extending gains in the afternoon and closing up 1.3 percent at 1,228.36. The yen touched a two-week low of 102.76 per dollar.
Japanese bonds accounted for 55 percent of GPIF’s portfolio at the end of December, the smallest share since the fund was established in its current form in April 2006. GPIF held 17 percent of its assets in local shares last quarter, 15 percent in foreign equities and 11 percent in overseas bonds, according to a statement on its website.
The health ministry advisory committee gave eight scenarios for Japan’s economic outlook today, with the implied 4.2 percent GPIF return target based on median figures for the group’s preferred assumptions. It is made up of the 1.7 percent target, plus real total worker compensation increases of 1.3 percent and inflation of 1.2 percent.
“The wage-growth assumption strikes me as rather optimistic,” Long Hanhua Wang, an economist at Royal Bank of Scotland Group Plc in Tokyo, said by phone. “It’s a fact that momentum for higher wages is building even among small and medium-sized companies. But I don’t think wage increases will exceed inflation this year.”
A 4.2 percent nominal goal would be the lowest among pension funds against which GPIF compares itself. California Public Employees’ Retirement System targets a 7.5 percent annualized nominal rate of return, or 4.75 percent in real terms, while the Canada Pension Plan Investment Board and Norway’s Government Pension Fund Global each require a 4 percent annualized real rate, according to data on the funds’ websites.
The goal is also lower than a rate recommended by Takatoshi Ito, who headed a separate panel handpicked by Abe advising on a public pension overhaul last year. GPIF should put half its assets in stocks and seek a 5 percent yearly return, Ito said in a Feb. 14 interview in Tokyo.
Ito’s group urged GPIF in November to review domestic bond holdings and consider buying inflation-linked debt and real estate investment trusts. The health ministry panel echoed those recommendations in today’s draft report.
There is no need for the Japanese fund to focus on passive investments should there be opportunity to gain better profits from actively managing funds, the committee said. GPIF should consider investment in indexes based on company returns, not just traditional gauges, and study managing some funds in-house to lower costs rather than depending fully on external asset managers, it said.
The health ministry isn’t opposed to using indexes based on return on equity, the health ministry’s Mori said.
The JPX-Nikkei Index 400, a stock gauge with members selected for their profitability and use of cash, started from January. GPIF President Takahiro Mitani said in December the fund is “still considering” whether to use the measure as its benchmark.
GPIF returned an average 2.8 percent over the nine years through March 2013, compared with 7.3 percent for Calpers, 6.8 percent for CPPIB and 5.2 percent for Government Pension Fund Global, according to Bloomberg calculations based on data from GPIF’s website.
The health ministry set GPIF’s current return target of 4.1 percent on an annualized nominal basis, or 3.1 percent in real terms, in February 2009 when it finished its last financial study on pension funds. The target was set on the grounds that consumer prices would rise 1 percent and nominal wages would increase 2.5 percent.
Labor cash earnings including bonuses and overtime, the benchmark for wages, fell in three out of four years from 2009 through 2012 and were unchanged in 2013, according to the health ministry. Consumer prices excluding fresh food dropped in the four years from 2009 through 2012 before rising 0.4 percent last year, according to the Ministry of Internal Affairs and Communications.